Del Monte Upped to Outperform

Del Monte Foods Company (DLM) engages in the production, distribution and marketing of branded food and pet products for the retail market in the United States.

The company has benefited from many of its strategies and initiatives taken during fiscal 2009. Del Monte implemented price increases across the product portfolio, which helped it to post strong profits during the first quarter of fiscal 2010, compared to a net loss in the comparable prior-year period.

Further, Del Monte is implementing enhanced trade fund management capabilities and upgrading systems and processes of marketing, planning and budgeting. As the processes and systems are strengthened, management expects to implement improved demand planning, drive supply chain efficiencies and reduce working capital levels. Moreover, the company expects to significantly improve the efficiency of dry pet food manufacturing and distribution.

In the U.S., Del Monte plans to accelerate growth through continued emphasis on product and packaging innovation. The new packaging and increased marketing efforts have boosted sales growth of tuna-in-a-pouch so that it now accounts for 25% of the company’s tuna sales.

Operational efficiencies will improve long-term profitability. Management has already achieved $70 million of savings in fiscal 2008. The savings should help offset inflationary cost pressures, along with prices increases. During the third quarter of fiscal 2008, the company implemented a series of price increases across 70% of the portfolio to compensate for higher input costs.  

The guidance for both earnings and revenue growth for fiscal 2010, exceeded the long-term range, and are now expected to increase by approximately 15% and 4% to 6%, respectively. Previous expectations for earnings growth was in the range of 7% to 9% and top-line growth in the range of 3% to 5%.

We have therefore upgraded our rating on the stock from Neutral to Outperform. Our long-term Outperform recommendation is driven by strong pricing actions and continued emphasis on marketing, planning and budgeting discipline.

Read the full analyst report on DLM