Super Mario’s Top 2 Picks for 2013

by Will Ashworth | January 25, 2013 12:15 pm

Mario Gabelli is one of the best value investors of any generation. He founded and runs the $30 billion Gabelli Asset Management Company Investors, and is one of the wealthiest human beings on the planet.

Thus, he fittingly belongs among the nine investment industry heavyweights on Barron‘s Roundtable — a group that includes names like PIMCO founder (and “Bond King”) Bill Gross, as well as T. Rowe Price CEO Brian Rogers.

Gabelli — along with the rest of the Roundtable — recently sounded off on their top 10 picks of 2013[1]. And two of his picks struck an especially pleasant chord with me:

Hillshire Brands

Formerly the North American meat operations of Sara Lee, it became an independent, publicly traded company on June 28, 2012, when Sara Lee shareholders received one share of Hillshire Brands (NYSE:HSH[2]) for every five held in Sara Lee. In addition, its tea and coffee business was spun off into D.E. Master Blenders 1753 N.V. (PINK:DEMBF[3]) on a 1-for-1 basis, with shareholders receiving a special dividend of $3 per share.

Just like that, the former conglomerate was no longer.

Hillshire Brands reports its second-quarter results Jan. 31 — its second report under the new moniker. In the first quarter ending Sept. 30, HSH’s net sales (excluding the impact of businesses exited) improved 2% to $1.01 billion.

Its retail business — led by Jimmy Dean breakfast sausages and Ball Park hot dogs — was the better of its two operating segments, with revenues increasing by 3% to $719 million; more importantly, adjusted operating income improved by 45.5% to $84 million. On the profit end of things, higher volumes and pricing combined with lower commodity costs contributed to a 280-basis-point increase in its gross margins. Lower selling, general and administrative costs led to a 340 basis point increase in operating margins.

Given that the retail business represents 74% of Hillshire Brands’ revenue, shareholders should be very happy about its performance.

Hillshire Brands sold its Australian bakery business in December so it could focus on its North American operations. Approximately 88% of its revenue comes from meat-related products, most of which are brand leaders. Its Hillshire Farm brand has 80% household penetration in lunchmeat — a $4.8 billion category in the U.S. — compared to 28% for other branded lunchmeat. The same applies with its Ball Park brand in the hot dog category and Jimmy Dean in the breakfast sausage and frozen breakfast categories.

According to Symphony IRI Group research, meat-centric meals are a $68 billion market in the U.S. and growing by a steady 2% annually. Of that $68 billion, Hillshire Brands has just 4% market share with plenty of room for growth. I wouldn’t be surprised if it sells its remaining bakery business in 2013 and uses that cash to buy another meat brand.

Sara Lee’s business was once an unfocused mess in all kinds of industries; it’s now focused exclusively on meat-related brands. And that’s exactly why Gabelli believes it could go from $30 to $50 within two years.

Boulder Brands

Steve Hughes has been CEO since Boulder Brands (NASDAQ:BDBD[4]) inception in May 2005. One of his past jobs was CEO of Celestial Seasonings: In June 1997, he took on the task of revitalizing the tea company in 120 days, and less than three years later, Hughes sold the company to Hain Food Group for $390 million; the two companies merged into the Hain Celestial Group (NASDAQ:HAIN[5]), which today has revenues of $1.5 billion.

Needless to say, the man knows a thing or two about consumer packaged goods.

Hughes created a blank check, or “special purpose acquisition company” (SPAC), in December 2005 that raised $95 million for the specific purpose of acquiring a food and/or beverage company operating in the U.S. SPACs require that a business be acquired within 18 to 24 months or the funds raised are returned to investors with interest. While they don’t have a great record of success, Hughes was able to acquire GFA Brands for $465 million in September 2006, nine months into his search.

One of the brands acquired was Smart Balance, a maker of healthy versions of butter, milk, etc. The SPAC was renamed Smart Balance Inc., and Hughes was off to the races.

In the past two years, Hughes has made two large acquisitions: Montreal-based Glutino Food Group for $66 million in May 2011, then Denver-based Udi’s Healthy Foods for $125 million in May 2012. Both companies manufacture gluten-free products, one of the fastest growing segments of the food business, worth an estimated $4.2 billion in 2012.

With a corporate relocation to Boulder, Colo., this summer and five successful natural brands under its belt, Hughes felt a name change was in order.

I love Hillshire, and I love Boulder Brands even more. It has to be very appealing to a larger food company like Kellogg (NYSE:K[6]), General Mills (NYSE:GIS[7]) — or even Hain Celestial.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

  1. top 10 picks of 2013:
  2. HSH:
  3. DEMBF:
  4. BDBD:
  5. HAIN:
  6. K:
  7. GIS:

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