Maple Leaf Foods shares have gone nowhere for years, and in that environment generous executive compensation and head-office costs make it a target for shareholders with an agenda to get the stock moving.
The obvious issue is that the company's stock has been a bit of a pig. In the stretch from 2005 to 2009, the company's shares returned negative 17 per cent. In that time, the Standard & Poor's Food Index rose 20 per cent, and the S&P/TSX Composite Total Return Index gave shareholders a 45 per cent return.
There are a number of likely hot-button issues for any shareholder trying to change that.
- Find a way to unlock or improve the value of the meat businesses. Almost all the value in Maple Leaf right now is in its bread business. Subtract the value of its stake in Canada Bread from Maple Leaf's market capitalization and it's clear the market values the rest of Maple Leaf (mostly the meat businesses) at only about $200-million.
- Reduce head office costs. In a commodity-based business, Maple Leaf doesn't have a ton of control over its cost of goods sold, because pigs and flour cost what they cost -- and of late that's eaten up about 85 per cent of revenue. But there's another big target for potential cost-cutting. Selling, general and administrative costs at Maple Leaf have averaged around $515-million over the past two years. For a company with revenue of around $5.2-billion, that approaches 10 per cent of sales. Tyson Foods, the huge U.S. food company, has SG&A of more like 3 per cent of revenue.
- A big red flag for an activist shareholder is the compensation at Maple Leaf. Chief executive officer Michael McCain had total compensation of $7.4-million in 2009, $4.5-million in 2008 and $8-million in 2007. That's a tally approaching $20-million. (For context, in that same period Royal Bank of Canada paid its CEO, Gord Nixon, $32-million to run the country's largest financial institution.) In that time, revenue hasn't budged off the $5.2-billion level, SG&A costs have risen, and operating income has gone from $172.8-million in 2006 to $196.1-million last year with most of the recent improvement from lower input costs.
Follow Streetwise on Twitter.