Hillshire Brands Co (HSH): A Profitable and High Yielding Food Company

Mario Gabelli, the Chairman and CEO of GAMCO Investors, is famous for his long-term investment track record. Since 1986, he has beaten the S&P 500 by more than 2% per year. He also has grown the assets under management to over $30 billion. In a recent 2013 Barron’s Roundtable, Mario Gabelli talked about several stocks that he felt confident about. Let’s look closer into his thesis to determine their attractiveness.  In this article, we will look at Hillshire Brands Co (NYSE:HSH).

Business snapshot

Hillshire is considered to be the leading meat-centric food solutions provider for foodservice and retail markets. The company is operating with three main business segments: Retail, Foodservice, and Australian Bakery. In the retail business, Hillshire markets packaged meat and frozen bakery products such as hot dogs, breakfast sausages, and breakfast sandwiches to retail customers in North America. The foodservice business sells meat and bakery products to restaurants, hospitals, and other institutions, while Australian Bakery sells frozen dessert, ice cream, and savory products mainly in Australia and New Zealand. The retail business generated 71% of the total revenue in fiscal year 2012, whereas the Foodservice segment ranked second, with 26% of the total revenue. The company’s biggest customer was Wal-Mart Stores, Inc. (NYSE:WMT), which accounted for 25% of net sales.

$35 – $50 range in two years

Mario Gabelli thought there was a high probability that Hillshire would be acquired. The company was estimated to generate $4.1 billion in revenue in the fiscal year ending June 30. The EPS would be around $1.60-$1.65, and in 2017 EPS could even increase by 45% to $2.40. Gabelli mentioned that Hillshire was the leader in all of its three business categories, including breakfast sausages, lunch meat, and hot dog. In addition, the company has kept reducing its debt level. As of September 2012, it had $311 million in total stockholders’ equity, $253 million in cash, and $942 million in long-term debt. To focus on its core meat business, Hillshire has recently announced it will sell 100% of its Australian Bakery business to McCain Foods for $85 million. At the current trading price of $30.50 per share, Hillshire’s total market capitalization is $3.73 billion. The market is valuing Hillshire at 19x forward earnings. If Hillshire could earn $2.40 per share as Gabelli estimated, the 15x P/E would translate into a $35 stock price. For 20x earnings, Hillshire might reach $48 in 2014. Thus, Gabelli said shares could reach $35 – $50 in around two years.