Hillshire Brands: Long-Term Growth Prospects and Concerns

Sara Lee Corporation (NYSE:SLE) recently spun off its international hot beverages business (tea and coffee) from its remaining businesses to become two independent public companies. The international coffee and tea business was name D.E. Master Blenders 1753 and the remaining food products and food services division was classified as Hillshire Brands Company (NYSE:HSH).  Further information on the split can be found here.

We will be replacing the Sara Lee model and content with the newly formed entity, Hillshire Brands, and will be releasing the restructured model soon. Below we present a brief overview of the long-term prospects of the company.

Hillshire Brands is primarily a manufacturer of meat-centric foods, which constitute around 85% of its revenue base. It also manufactures sweet baked goods, which make up the remaining 15%. The company can be broadly divided into three distinct operating segments, namely – retail, foodservices and its bakery business in Australia.

The core strength of the company lies in its strong brand portfolio, which includes well known names such as Jimmy Dean, Ball Park, State Fair and Hillshire Farm. Management plans to drive growth through continued focus on these core brands, along with diversification into other food segments.

The company has a market cap of $3 billion, which is considerably lower than its main competitors, Tyson Foods Inc. ($5.5 billion) and Hormel Foods Corporation ($7.5 billion). It reported total revenues of around $4 billion in fiscal 2012, of which around 72% was from retail, 25% from food services and 3% from the Australian bakery business.

The management has identified innovation and marketing as the key drivers of growth in the long term, complemented by brand building, diversification into other food segments and margin increases through the effective execution of cost cutting strategies. Innovation here refers to the development of unique meal-centric food products which would have health/other advantages over traditional meat based foods. ^[1]

Meat-centric foods, however, are predominantly meat based by their very nature. There is growing medical evidence that the daily consumption of red/processed meats may result in a multitude of health complications, including heart disease and cancer. As a result, the meat industry in the US is set to see a slowdown in growth looking forward, and this would apply to meat-centric products as well.

The company expects the market for its products to grow at an annual rate of around 2%. We believe this to be an overly optimistic assumption and cannot be a driver of revenue growth in the long term. Instead, we believe that the best chance for the company to experience above average growth is by gaining market share from its competitors through product innovation and aggressive marketing/advertising strategies. We also note that competitors such as Tyson and Hormel, are reputed and well established players in the industry.

Another concern is the fact that margins are closely linked to commodity prices. The animals from which the meat is obtained are fed grains and other crops, whose prices have been highly volatile recently due to the drought. A large part of these costs would be passed on to customers as meat prices also increase correspondingly. These factors will continue to bring uncertainty to the bottom line in the long term.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Hillshire Brands Company Unveils Business Strategy and Mid-Term Financial Targets at Inaugural Investor Day, Sara Lee Corporation, June 2012 [↩]