Sara Lee (SLE)
Jim: Don't buy
Sara Lee (SLE)
Jim: Don't buy
Jim: It's a good thing that Sara Lee's new chief executive is trying to turn this company upside down, because if he wasn't I believe Sara Lee would soon succumb to a new owner that would.
Mike: Now Jim, before we continue with all that important corporate stuff, let me start by saying I think of Sara Lee as an old friend.
Jim: My, so warm and fuzzy today, Mike. Let me guess. You're referring to all of Sara Lee's processed meats, baked goods and other foods that you can eat in a jiff?
Mike: Yes, sort of. I was thinking of my years of bachelorhood, when I and my friends subsisted almost exclusively on Sara Lee cheesecake. Today this company also makes Ty-D-Bol cleaner and the Wonderbra.
Jim: Boy, you're all over the place today.
Mike: And so is Sara Lee, which goes back to your initial point. See, this company has over the years secreted a dizzying number and variety of products, which I think is clearly one of its problems. It's too diversified. And the new CEO, Steve McMillan, says he's determined to simplify this company by, among other things, selling or spinning off several subsidiaries.
Jim: Good for him. There's lots to choose from.
Mike: Right. We could spend 10 minutes going through the list, but it includes such familiar supermarket items as Ball Park franks, Hillshire Farm meats, Jimmy Dean sausages and the Sara Lee baked goods, of course.
Jim: Then there's not only the Wonderbra, but Hanes underwear, L'eggs hosiery and Playtex intimate apparel. Then there's the Coach line of leather goods, which is one of the units McMillan plans to spin off via an initial public offering. He's also planning an IPO for PYA/Monarch, a big food-services outfit, and he wants to shed the Champion apparel and International Fabrics divisions.
Mike: But you left out my personal favorite Sara Lee company: Kiwi shoe polish!
Jim: Now, like any conglomerate the idea behind having all of these brands was that, if one group fell down for a while, the others would carry its weight. But Sara Lee is a case where this isn't working. Instead, being so diversified makes the whole company simply too cumbersome. I mean, this isn't a conglomerate, it's a train wreck.
Mike: Sara Lee's performance has definitely sagged, which is why its stock has lost a third of its value since mid-1998. The stock sells for just 14 times the per-share profit the company is expected to post for its fiscal year that ended June 30. And therein, I might add, lies the stock's attraction.
Jim: You can't be serious. You're attracted to this stock?
Mike: Hear me out. I basically agree with McMillan's strategy and believe it will get the stock price back up. He understands the problem--that there's just too much stuff under the Sara Lee umbrella--and he's fixing it.
Jim: Well, the stock has climbed from $17 all the way to $19 since he unveiled this strategy, which shows Wall Street is less than excited. Investors want more hard evidence that Sara Lee's growth will pick up steam after the company is streamlined, and I share the feeling.
Mike: But this is still a profitable company, and one with healthy profit margins--more than a nickel per dollar of sales. The divisions Sara Lee is keeping should keep seeing good revenue growth, and earnings will be helped by the restructuring. And with the stock selling for 14 times earnings, I see prospects for some multiple expansion.
Jim: Multiple expansion? You mean the price will go higher relative to the earnings.
Jim: I say no. First of all, those IPOs for Coach and PYA/Monarch are going to take time to unfold, giving Sara Lee's stock no lift in the meantime. Also, Sara Lee will be left with dozens of brands in several different industries, and it's an open question whether McMillan can get those remaining brands hitting on all cylinders. I mean, will Wonderbras and Ty-D-Bol really complement each other if they don't already?
Mike: Very funny. But I believe McMillan will work hard to bring focus to this company and the effort will pay off.
Jim: I'll admit I'm worried about one thing that could make my prediction all wet.
Mike: There's just one?
Jim: I fear Sara Lee might get bought.
Mike: By Microsoft?
Jim: No, and not by Florsheim Shoe, either. But the fact is, food companies are buying each other up like crazy these days--witness Unilever agreeing to buy Bestfoods, to name just one deal--and there's no reason to think Sara Lee's food units wouldn't be attractive to someone. If that happens, Sara Lee's stock will obviously go higher.
Mike: Yeah, but even if we set a takeover threat aside, Jim, there's very little downside to Sara Lee's stock from here, given the company's outlook. So my money would be on McMillan.
Write or e-mail with a stock you would like to see discussed in this column. Peltz (firstname.lastname@example.org) covers the markets and corporate financial trends. Hiltzik (email@example.com) covers technology and entertainment and is the author of the book "Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age" (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.
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