Del Monte Foods (DLM) has extended its steady upwards trend today, but even after the impressive run of 84% in the last year, the stock may have further to rise. While the stock has been on an undeniable tear, DLM’s fundamentals have advanced in proportion during that time. We last wrote a note on DLM in December (Del Monte Foods Nearing New Highs and Still Cheap) after their last quarterly report in which they blew past analysts’ earnings estimates by 71% and raised guidance for the rest of the year. Since that point, the stock has continued to appreciate nearly 20%, but again today they have beaten estimates and lifted guidance once again.
In the past quarter, Del Monte netted $59.4 million or 28 cents per share, which is slightly less than last year. However, this quarter’s results were hampered by 6 cent per share in refinancing costs, and still they handily topped Wall Street’s view of $.21. Revenue grew by 8% to $1.01 billion which was nearly doubled the growth rate expected by analysts. This strong performance has prompted management to substantially lift full year guidance yet again. Now, fiscal 2010 earnings are forecasted to come in at $1.07 to $1.11 versus previous
guidance of $.93 to $.97. The new forecast includes 11 cents of refinancing costs, whereas the previous forecast had allotted for only 5 cents. Lower costs and better than expected sales growth are helping to expand gross margins from previous expectations of 10.6%-11.6% to 12.3%-13.3%. Through the first nine months of the year, DLM has earned $.89 per share which is a substantial improvement to earnings of $.40 through this point last year.
Del Monte is seeing strong growth in both its Consumer Products division (mainly fruits and vegetables) as well as its Pet Products business as both saw sales increase by 7-8%. However, the Pet Products was the bigger winner in the quarter with operating income jumping 19.3% due to cost controls and unit volume growth. As for Consumer Products, increased spending offset the sales growth.
Coming into this week, we had an Undervalued stance on Del Monte and we are unlikely to downgrade it following this report. Sales and earnings growth have consistently been much better than expected. For example, in each of the last five quarters DLM has topped analysts’ estimates by a fairly wide margin each time. They are grabbing market share in both divisions and in general costs and debt are falling, which are clear signs of a company running well. The stock is trading over $13 on Thursday following the earnings release, but based on the current fundamentals we believe this stock could reasonably fetch $14 to $17. So, value investors have not yet missed their opportunity in Del Monte.
