The Street: It’s Splitsville for Food Companies in 2012

By Alexandra Zendrian

January 9, 2012

NEW YORK (TheStreet) — For the consumer goods sector, 2012 will be about how some companies handle breaking apart and how they perform after they split.

Some of the breakups this year include Kraft Foods, Sara Lee and Ralcorp. Look for Ralcorp’s and Sara Lee’s breakups to be completed toward the beginning of 2012, with Kraft’s split taking place before the end of the year.

Investors seem to be searching for more pure plays in this sector rather than widely diversified companies, according to Scott Rostan, founder of Training the Street. The advantage for people who invest in these split-up companies is that they can hone in their focus on the markets and deal with less baggage.

In the case of Sara Lee, the split involves separating the North American retail and food service businesses, which include brands such as Jimmy Dean, Ball Park and Sara Lee itself, from the company’s international beverage and bakery business, which includes Senseo and Maison du Café. The North American food business had $4.1 billion in revenue in fiscal 2010; the international business reported $4.6 billion in the same time period.

The company’s inability to leverage its scale because several products were being sold to different consumers helped to necessitate Sara Lee’s split, explained Morningstar analyst Erin Lash.

Lash has an $18 fair value on the stock and three-star rating on the company. The average analyst target price for Sara Lee is $19.67 with the majority of the 14 analysts who cover it (eight) saying it’s a hold. TheStreet Ratings gives Sara Lee a B-; it is a buy with a price target of $24.10. Shares of Sara Lee increased 8% in 2011.

Ralcorp will be spinning out its Post cereal business; the move is expected to be completed by the end of January. In this deal, Ralcorp will get about $900 million from Post. Ralcorp has incurred about $2.8 million in costs trying to separate out Post, the company said in its fourth-quarter earnings. Sales volumes of almost all of the Post brands were down in the fourth quarter except Great Grains, which had an increase of 26%. These cereals had $232.8 million in net sales volume in the fourth quarter, a 2% reduction.

Ralcorp got a takeover offer of $94 a share in 2011 from Omaha-based food company ConAgra for a , but the bid was withdrawn.

Janney Capital Markets analyst Jonathan Feeney gave some input in a recent report as to why Ralcorp might have not liked the deal.

“While some questions linger regarding the rationale in turning down ConAgra’s (CAG-BUY) $94 bid, it is clear that ConAgra’s advance was timed to take advantage of a historically low valuation for RAHshares that appears largely tied to misexecution on Post,” Feeney wrote.

In part because of Ralcorp’s plentiful private label deal pipeline, which includes 50 potential targets with a total of $10 billion in sales, Feeney said he considers Ralcorp’s fair value to be $87. Morningstar’s Lash has a three-star rating on the company and a $77 fair value on the stock. The average analyst price target for Ralcorp shares is $87.38. The highest number of analysts (five) consider the stock a hold, while four consider it a strong buy and three a buy. Shares of Ralcorp increased about 31% in 2011. TheStreet Ratings has a hold rating on the stock with a C+ grade.

Kraft will be splitting into a global snacks firm and North American grocery company, which is projected to happen before the close of 2012. Kraft CEO Irene Rosenfeld will head up the global snacks company, which includes brands such as Oreo and Nabisco and is anticipated to generate $32 billion in annual revenue. Kraft’s Executive Vice President W. Anthony Vernon will lead the grocery company with brands such as Oscar Mayer and Philadelphia cream cheese. This company is slated to have $16 billion in annual revenue.

Morningstar’s Lash said she considers Kraft’s move to split to be “value enhancing.” She rates the company at three stars with a $39 fair value. The average analyst price target is $39.41; eight of the 19 analysts covering the stock categorized it a strong buy. Six analysts rate it a buy and five call it a hold. TheStreet Ratings gives Kraft an A+ and considers the stock a buy with a price target of $42.47. Kraft shares increased almost 19% in 2011.