Investing to Wealth

The Sara Lee Corporation (SLE) announced today that are entertaining offers for its Household and Body Care Business, after reportedly receiving expressions of interest.  The company has said that it will evaluate strategic alternatives, including the option to divest the business.  The household and body care division brought in about 12% of revenue during the 2006 fiscal year, but has grown as a percentage of overall revenue since then to 15% this year.  Sales did show signs of weakness in the second half of the year due to dropping volumes and foreign exchanges challenges.  According to the company’s press release the Household and Body division is expected to bring in $2.3 billion in sales this year and employs some 8,000 people.  According to Brenda Barnes, Sara Lee’s Chairman and Chief Executive:

“Our Household and Body Care business has very strong brands, great distribution and a talented leadership team. In keeping with our commitment to value creation, we will carefully evaluate all opportunities and do what is in the best interest of the company and its stakeholders.”

This is an interesting time to possibly look to sell one of the divisions.  This move coincides with recent efforts to streamline operations around the company’s core business, the packaged foods division.  The company spun-off its apparel division, Hanesbrands (HBI), in the summer of 2006 which took a large chunk of revenue and thus far has not improved margins.  The current potential move seems to fit right into the company’s restructuring.  Of course, this is all contingent upon someone being willing to pay for the household and body division.  If no one is willing to pay adequately for the brand, we would except the company to possibly divest the division, but it appears it will no longer be under the Sara Lee umbrella.

We initiated our Overvalued valuation as of last week’s report.  The cash earnings have fallen off in the last few years and the stock is currently trading at current price to cash flow of 21.7x, but the company has normally traded in a range of 8.7x to 13.3x.  Revenue has begun to grow again, after 40% of it left with Hanesbrands but it is not yet back to where it was with Hanes.  So, we would like to Sara Lee lift cash flow and continue growing revenue before we become more positive on the stock, but if they are able to raise a good amount of cash in this offer that could not hurt our analysis.  Sara Lee is hoping that by focusing on its core packaged foods division it will be able to improve margins and lead to a better value for their shareholders.

Sara Lee Could Thin Down Offerings