Canadian food group Maple Leaf Foods may struggle to meet its full-year guidance as drought pressures in the US continue to place pressure on commodities, an analyst has warned.
Droughts across the US may hit the firm’s profits, TD Securities VP and director Michael Van Aelst said. The US Department of Agriculture last week lowered its forecast for domestic corn production, confirming market fears the country’s worst drought in almost 25 years has hit yields and would push up prices.
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“The worst drought to hit the US in over half a century has pushed up commodity prices – some to multi-year highs – and, in our opinion, will make it next to impossible for Maple Leaf to meet its guidance in 2012,” Van Aelst said. “We are now looking for Q2 adjusted EPS of $0.22 (down from $0.28) versus $0.30 last year and in line with consensus (range of $0.18-0.24).”
Maple Leaf is set to report its second-quarter earnings results on 1 August. The company has targeted double-digit EPS growth and an EBITDA margin of 9.5% for 2012.
Van Aelst believes Maple Leaf is set to report its third straight quarter of falling EPS growth, despite the benefit of the company’s Value Creation Plan, a programme implemented by the company to improve margins.
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He puts this down to “the unfavourable trends in primary pork processing spreads (which turned negative in Q2/12); 2) the spike in grain and livestock prices as drought continues to threaten most crops – we would say this is more of an H2/12 issue for Maple Leaf; and 3) the outright cancellation of a fresh bakery price increase originally scheduled for March 2012 following an unusual competitive response”.
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By GlobalDataAs a result, Van Aelst said his EPS estimates fall to $0.91 from $1.10 previously for 2012 and to $1.22 from $1.30 for 2013.
Nonetheless, he added: “These short-term factors are expected to keep pressuring the stock, but … the typical rebalancing of selling prices to reflect changing costs and the operational improvements expected from the VCP, we believe that the disclosure of Q2 results and likely revised guidance will create an attractive entry point for investors with a long-term view to build positions.”
