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Published: June 14, 2010
The past decade has been tough for
stocks, with the bursting of the Internet and housing bubbles
creating share price volatility too extreme for many investors.
As for blue chip companies, sky-high valuations in 2000 have
left little in terms of total stock returns, even though
earnings growth at the most stable firms has continued apace
during this timeframe.
One leading firm has taken a unique approach to creating value
for its shareholders by slowly breaking itself into pieces. One
of the first transactions was the spinoff of handbag maker
Coach (NYSE: COH). Investors that got in on the ground floor
about a decade ago have seen a 20-fold increase in Coach's share
price. In 2006, the firm in question spun off Hanesbrands
(NYSE: HBI) to shareholders. Hanesbrands shares have
returned about +50% since then, well ahead of the overall
market's return of a little more than +15% during this
timeframe.
The company responsible for keeping a small army of investment
bankers fully employed is food processing and packaging firm
Sara Lee (NYSE: SLE). The company has become quite adept at
trimming its operations. And rather than seeing a slowdown after
more than a decade of activity, it has actually become more
focused on jettisoning business units. The only change is that
in the past Sara Lee relied on spinoffs, while it has recently
shifted gears to outright asset sales to archrivals.
Recent deal activity stems from Sara Lee's strategy to sell off
its entire international household and body care division. The
hair care business is being purchased by consumer goods titan
Procter & Gamble (NYSE: PG), the European detergents
business will be bought by Unilever (NYSE: UN) and the
Indian hair care, shoe care and male hair care divisions are
being sold to a joint venture partner.
These sales will provide funding for Sara
Lee to repurchase between $1 billion and $1.3 billion of shares
during 2010. Future sales and
cash flow generated will provide the cash for $2.5 billion
to $3 billion in buybacks during the next three years -- a
significant amount given Sara Lee currently sports a total
market capitalization of just under $10 billion.
Reducing the shares outstanding by 33% will boost per share
earnings significantly, even without any improvement in the
remaining businesses. What will remain are food brands in North
America such as Hillshire Farm, Ball Park and Jimmy Dean, along
with bakery brands including the Sara Lee namesake and Earth
Grains. A food distribution unit will also remain in North
America, as will international beverage and bakery operations.
Action to Take --> After
years of asset sales and divestitures, Sara Lee should emerge a
more nimble food, beverage and bakery firm. The constant state
of flux in the market has caused investors to miss the appeal of
the current business and could even lead to a takeover bid by a
rival, giving shareholders a hefty premium to the current stock
price.
Share buybacks and a modest improvement in sales and earnings
going forward are all that will be needed for investors to see
significant returns by purchasing Sara Lee shares. It's not
difficult to see earnings of a couple of dollars a share by
2013. By applying a modest
P/E of 13, which is the current industry average, this
implies a stock price of $26, or about +75% higher than current
levels.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
