Sara Lee’s Split Will Unlock Value, Profitability in Leading Brands

SLE: Sara Lee logo
Sara Lee

Sara Lee (NYSE:SLE) will soon spin-off into two separate, pure-play International Beverage and North American Meat companies. Despite an envious portfolio of market leading meat and beverages brands such as Jimmy Dean, it has been under-performing and trailing peers in terms of profitability over the last few years. It has also been struggling with rising commodity costs and shrinking margins.

The recent divestiture of less competitive and non-core businesses and the coming spin-off is expected to help profitability and market share of its core meats and international beverage businesses. The spun-off entities could also emerge as attractive takeover targets for other Food and Beverage players. The new International Beverages business will be named D.E Master Blenders 1753. Sara Lee competes with major food and consumer companies like Kraft Foods (NYSE:KFT) and Nestle (NYSE:NESN).

See our full analysis for Sara Lee

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International Beverages is Sara Lee’s Most Valuable Business

The international beverage division is the biggest source of value for Sara Lee, accounting for over 55% of its stock value, and the division’s gross margins are higher than the company average.

In 2009-10, the division had gross margin exceeding 40%, compared to the company average of 34%. Even though the division’s margin declined to 34% in 2011 due to high commodity costs, we expect the margin level to exceed 38% over the next few years through cost-cuts, better resource focus, pricing and input commodity costs moderation.

Strong Market Share in the Meats Business

With iconic brands like Jimmy Dean, Hillshire Farm and Ball Park, that occupy highest market share in their respective product categories, the North American Retail division accounts for more than 30% of Sara Lee’s stock value. The split in businesses is expected to reduce costs and improve supply-chain management and profitability of these core meat brands in North America.

We currently have a $21 Trefis price estimate for Sara Lee, which is in-line with the current market price.

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