Menu Foods is a maker and distributor of private label wet pet food products in Canada and the United States. Their products are sold in grocery stores, big box retailers, drugstores, as well as to veterinarians and farm and feed operations. Menu Foods is most famous for a March 2007 recall of over 60 million containers of pet food due to animals getting sick and dying. Has the hangover of the recall worn off enough to make the stock a buy?

Why Is It Cheap

There was a bit of a recall back in 2007 I think. I can’t really remember what exactly happened, but I seem to remember it was kind of a big deal.

Seriously now, the company had a huge charge on the books back in 2007 to deal with the recall. This levered up the balance sheet, leading to the company being in a worst financial state.

Industry Outlook

People love their pets and aren’t about to stop spending money on them. Wet food is more expensive than dry, leading to better margins for Menu. Pet owners are, as a group, likely to spoil their pets and buy them things like wet food and treats. The company will have to join every other income trust as a corporation in 2011, a conversion made much easier considering the company no longer pays a distribution.

On a negative side, there is still a great deal of negativity surrounding the company. The same passionate pet owners who spoil their pets have long memories and have moved onto other forms of food.

Dividend

The company paid a distribution of 10.5 cents per quarter upon their IPO in 2002, eventually cutting the distribution to zero in late 2005. Note that the company didn’t pay a distribution upon the recall of 2007.

Balance Sheet

The balance sheet is only is fair shape. The company has a book value in the $1.45 range per share. At a current price of $3.61, the company is trading at more than twice book value. This is typically a larger premium than what we usually look at. The company is sitting on approximately 90 million in debt, a large number considering market cap is 78 million.

Earnings

2009- $0.47

2008- ($0.33)

2007- ($3.24)

2006- $0.22

2009 earnings were downright decent. The company continued their solid results in the first quarter of 2010, earning 19 cents per share fully diluted. It appears the company is past the recall. It trades at just 8 times last years’ earnings.

Insider Activity

I still cannot find a good site to find this info on Canadian companies. I should really spend some time on it one of these days.

Price Appreciation

As you can see by the chart, the company spent considerable time at much higher levels. I think there’s potential for a price increase over time, however I don’t see it happening unless a considerable part of the debt is paid off. The company has actually done quite well since the lows hit after the recall.

Summary

I think the company will trade at a discount for the next while. Investors haven’t forgotten about the recall, since they’re not giving the stock the love it deserves after posting such good earnings lately. Revenue has recovered from the 2007 lows, but not back to the highs of 2006. The high debt level also scares me, and I’m not sure if there are any lingering lawsuits from the recall. The company has earned a spot on the watch list, but I’m not too excited about the prospects.

Disclosure: I do not own shares in Menu Foods.

Tell everyone, yo!