Attention: Avoid This 1 Top TSX Stock!

Maple Leaf Foods Inc is trading above its intrinsic value. Here is why you should avoid the stock in your RRSP or TFSA!

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Maple Leaf (TSX:MFI) is a producer of food products that include prepared meats, ready-to-cook meals, ready-to-serve meals, value-added fresh pork and poultry and plant protein products. The company’s two segments are meat protein group and plant protein group.

The company reports a market capitalization of $3.19 billion with a 52-week high of $25.82 and a 52-week low of $21.87

Intrinsic price

Based on my calculations using a discounted cash flow (DCF) valuation model, I determined that Maple Leaf has an intrinsic value of $19.81 per share at writing.

Assuming less than average industry growth, the intrinsic value would be $19.08 per share; higher than average industry growth would result in an intrinsic value of $20.61 per share.

At the current share price of $25.59, I believe that Maple Leaf is substantially overvalued. I would advise investors to stay away from Maple Leaf for now, but add it to their watch list and wait for an opportunity to buy shares at less than intrinsic value.

Maple Leaf has an enterprise value of $2.85 billion, representing the theoretical price a buyer would pay for all of Maple Leaf’s outstanding shares plus its debt.

One of the good things about Maple Leaf is its low leverage with debt at 10.8% of total capital versus equity at 89.2% of total capital.

Financial highlights

For the nine months ended September 30, 2019, the company reports a strong balance sheet with $1.1 billion in retained earnings.

This is a good sign for investors, as it suggests the company’s surpluses in previous years have been reinvested to fuel business growth.

Maple Leaf reports cash and equivalents of $71 million with $74 million in current portion of debt. The company does not have enough cash on hand to cover its short-term liabilities; however, this is not a concern given its $1.3 billion revolving line of credit that is undrawn as at September 30, 2019.

Overall revenues are up materially from $2.6 billion in 2018 to $2.9 billion in 2019 (+12.5%), which is offset by an increase in COGS from $2.2 billion to $2.5 billion (+12.8%).

Increased SG&A coupled with increased interest expenses have resulted in pretax income of $63 million (down from $123 million from 2018).

From a cash flow perspective, the company increased its capital expenditure spending from $128 million in 2018 to $186 million in 2019 (+45%), which indicates the company is investing in its growth. This is a good sign for investors, as assets are used to generate revenue.

Even though debt accounts for a mere 10.8% of total capital, I would like to see management implement a debt management strategy, as the company made draws on its long-term debt for $100 million in 2019 and $163 million in 2018 with no repayments.

Foolish takeaway

Investors looking to buy shares of a meat processing and packaging company should avoid Maple Leaf. At its current share price of $25.59 compared to its intrinsic value of $19.81, I believe its share price is overvalued.

That said, Maple Leaf has solid financials with positive retained earnings, increasing revenues and continued profitability. My concern, financially speaking, are the draws on long-term debt of $100 million in 2019 and $163 million in 2018 with no evidence of payments to offset the draws.

If Maple Leaf dips below intrinsic value, I believe it would make for a good investment.

Should you invest $1,000 in Royal Bank of Canada right now?

Before you buy stock in Royal Bank of Canada, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Royal Bank of Canada wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Chen Liu has no position in any of the stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

A shopper makes purchases from an online store.
Tech Stocks

Buy the Dip on the Return of Recession Stocks?

If a recession comes back, there are some stocks that could fair well afterwards. And this is one of the…

Read more »

RRSP Canadian Registered Retirement Savings Plan concept
Retirement

Here’s the Average Canadian TFSA and RRSP at Age 60

Many Canadian retirees have tens of thousands invested in ETFs like the iShares S&P/TSX 60 Index Fund (TSX:XIU).

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

dividend growth for passive income
Investing

5 Canadian Growth Stocks to Buy and Hold for the Next 15 Years

These Canadian stocks have tremendous long-term growth potential, making them five of the best investments you can buy and hold…

Read more »

Man holds Canadian dollars in differing amounts
Stocks for Beginners

Cash Is King? Think Again During Today’s Market Dip

Sure, cash is great, but during a market dip investors may want to consider using some of the cash to…

Read more »

grow money, wealth build
Stocks for Beginners

How I’d Build a $15,000 Portfolio for Income and Growth With Canadian Value Stocks

Looking for some Canadian value stocks to buy without breaking the bank? Here's a trio to consider buying this month.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Investing

3 Canadian Value Stocks I’d Hold in My TFSA Through Market Volatility

Given their healthy growth prospects and discounted stock prices, these three value stocks would be ideal additions to your TFSA.

Read more »