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Value Line has initiated coverage of The Hillshire Brands Company (HSH) in its flagship product, The Value Line Investment Survey. The company is a new pure-play entity, focused on meat and meat-centric products. It is the successor to Sara Lee Corporation’s North American business. Hillshire Brands began trading on the New York Stock Exchange on June 29, 2012, following the spinoff of the company’s former international coffee and tea business. Annual sales are about $4 billion, and the company has 9,500 employees.

Hillshire Brands’ timeline dates back to 1939, as the C.D. Kenny Company. Since then, the company has undergone numerous name changes, exited some businesses that are unrelated to food, and acquired some brands that have a long history and are well known to many consumers. These brands include Jimmy Dean, Ball Park, Hillshire Farm, State Fair, Sara Lee, and artisanal brands Aidells and Gallo Salame. Management refers to this as the “retail” business. Hillshire Brands also owns a North American foodservice (meat and bakery) business and a separate operation that provides bakery foodservice in Australia and other parts of the Pacific Rim region. In fiscal 2012 (adjusted for one-time items), retail generated 79% of operating income; North American foodservice, 20%; and Australian foodservice, 1%. (Fiscal years end on the Saturday closest to June 30th.) About 85% of corporate sales are of meat products, with bakery making up the remainder. Wal-Mart accounted for about $1 billion of sales in fiscal 2012.

Companies that were once part of a larger organization often perform well following the spinoff. The management team can focus more attention on business that were, at times, neglected by previous management. Indeed, many of Hillshire Brands’ top executives are relatively new to the company. The chief executive officer, Sean Connolly, joined the company in January of 2012; the chief financial officer, Maria Henry, in July of 2011. That said, there is no assurance that this will occur here.

Hillshire Brands pays a modest annual dividend of $0.50 a share. With a yield that is close to the market median, the stock does not stand out for income-oriented investors. With a fairly short trading history, it’s hard to gauge how suitable this issue is for conservative accounts.

There is plenty of room for Hillshire Brands to expand in the meat sector. The company has a 4% share of a $68 billion market. The new management team is stepping up its efforts in product development. In fact, it hired a “chief innovation officer” in July. Cost cutting is another key objective. Having reduced costs by $90 million, Hillshire Brands is targeting another $100 million of expense reductions in the next three years.

The food business is traditionally a defensive sector, but this doesn’t mean that there aren’t risks. Hillshire Brands is facing some challenges, and management concedes that this is a transition year for the company. Some of its brands, such as Hillshire Farm, were neglected when they were part of a larger company. Accordingly, the lunchmeat business isn’t faring well. The dessert business is underperforming, too, perhaps due to increased health consciousness among consumers. Food inflation is a concern with any company in this industry. Market conditions don’t always allow companies to pass on their higher costs in prices. Furthermore, in a weak economy, consumers sometimes shift from branded to less-costly private-label products. Finally, Hillshire Brands has to make changes to its facilities in response to the federal government’s Food Safety Modernization Act.

Investors should also note that there were some accounting irregularities concerning the results of the Brazilian operations of the coffee and tea business that was spun off. This primarily affected discontinued operations. Management believes that these errors did not materially misstate the company’s financial results.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.