Friday, December 04, 2009

Del Monte -- Debt Restructuring Looms Large

Del Monte Foods (DLM) reported improved earnings and watched its stock sell off anyway. Go figure the market is manic depressive. Or is it? The company used an interested term to describe its increase in revenues and I quote “fiscal 2009 pricing actions net of elasticity”. Yep right there in the first bullet point. So they increased their prices yet they start talking about net elasticity in demand. This means management is waiting for the other shoe to drop.

The other shoe to drop will influence their ability to refinance their debt which they admit needs to be done in F10. Their debt is approximately equal to 50% of their market cap when the stock is trading near its 52 week high. Hmmm. They already are making noises about the big million dollar fees they know they have to pay. Watch how price elasticity affects debt negotiations.

Investors should take note that the pet food division creates more profits than the people food division; despite the fact that the people food division has more revenues and therefore more expenses and resources. So the extra financial cherry is in the pet food. Expect corporate communication to be very positive but the gains will go to debt repayment and not shareholder wealth.