Monterey Gourmet Foods: A pasta play
Monterey Gourmet Foods Inc. (Nasdaq: PSTA) has over the past 18 years transformed itself from a local purveyor of fresh pastas sold out of a Monterey, Calif., storefront to a publicly traded diversified prepared foods business that enjoys steadily growing revenues from a number of major food chains in the United States and abroad.
And investors have still not grasped its success. The Salinas, Calif., company’s stock established a 52-week low of $3.60 just last week, about six months after the year-high of $4.83 was put into place. On Wednesday Monterey closed at $3.65.
Clearly, there have been some challenges over the past year, most notably an aggressive realignment in which sales and marketing operations for the company’s multiple brands were consolidated and manufacturing was streamlined. Costs associated with this realignment helped produce a $3.1 million net loss last year.
But the company is now generating quarterly profits and is projected to become profitable for all of 2007, suggesting that its consolidation costs are mostly behind it. Two analysts who follow Monterey have a mean estimate for a $0.13 per share profit this year, compared with a loss last year of $0.19. They project revenues will grow to $103.1 million in 2007 and $115.8 million in 2008. The company’s revenues totaled $94.3 million last year, up from $85.3 million in 2005 and $62.5 million in 2004.
Earlier this month, Monterey reported a second quarter net profit of $464,000, or $0.03 per share, compared with $146,000, or $0.01 per share, a year earlier, and said revenues grew to $24.5 million from $23.1 million.
Along with consistent revenue growth, there are many other encouraging signs for this company, including a track record of smart acquisitions, a proven flexibility to adapt to changing consumer tastes, and a solid distribution network.
Monterey sells its products to 65 U.S. grocery chains including Safeway Inc. (NYSE: SWY), Albertson’s, Costco Wholesale Corporation (Nasdaq: COST) and Wal-Mart Stores Inc.’s (NYSE: WMT) Sam’s Club division, and also has overseas distribution to Canada, Korea, Mexico and Taiwan. Total distribution has grown from 20 stores in 1989 to more than 10,000 today.
While this growth reflects a growing consumer demand for all kinds of prepared foods that will save time in the kitchen, it also shows Monterey’s skill at navigating this fiercely competitive prepared food market, where rivals include everyone from the multi-billion dollar conglomerate Kraft Foods Inc. (NYSE: KFT), to tiny local food producers.
The company that was founded as a pasta maker managed to survive the low-carb diet craze by introducing multiple new food lines, from sandwiches to soups and cheeses, while also continuing to successfully distribute pasta by launching a healthier, whole wheat pasta brand.
In addition, Monterey has wisely recognized that the rise in prepared food presents an opportunity to sell more ingredients to other prepared food makers. To that end, Monterey in 2004 acquired CIBO Naturals, a maker of sauces, dips and spreads, which are used by other food makers in wraps and sandwiches, including those sold at outlets of Starbucks Corporation (Nasdaq: SBUX).
After completing four acquisitions in rapid succession between 2004 and 2006, the company stepped back and began devoting more effort to consolidating the assets it had bought. Today it says that it still needs to further lower operating expenses, which have limited its net income.
Perhaps it’s been those modest earnings of late as well as the company’s small size that kept investors on the sidelines and limited analyst interest in the company.
But those who are watching Monterey see promise.
In May, Merriman Curhan Ford initiated coverage of the company with a “buy” rating, projecting profitability for the company this year and next.
Clearly, Monterey Gourmet Foods did not discover the prepared food craze. SmallCapInvestor.com in May profiled another prepared foods maker, Overhill Farms Inc. (AMEX: OFI), whose stock at that time had risen sharply on recognition that more and more Americans are eating out and buying meals-to-go for home dining (see Riding the prepared-foods craze, May 8).
And while major food distributors like Kraft have are also offering more prepared foods, the smaller manufacturers like Overhill and Monterey Foods have able to more than hold their own by emphasizing fresh, often organic ingredients.
Monterey has exhibited growth similar to Overhill, but without the stock run-up -- it’s a good place for investors to find value in the packaged food sector.
