"Sara Lee Corporation (SLE) implemented the five-year Transformation Plan to create a focused consumer brand company generating sales growth in the range of 4% to 5% and earnings growth in the range of 5% to 8% by 2010. The Transformation Plan was announced over two-and-one-half years ago, and year-over-year EPS comparisons are now expected. The Plan was supposed to benefit Sara Lee in the long term, as over the first two years the project provided little earnings visibility.
However, the company in now in the third year of the plan, and the brand-building process is proving to be successful. The company is focused on the more attractive product lines and the operating margin is beginning to expand. Quarterly earnings comparisons in fiscal 2008 are expected to be positive. Hence, the Buy recommendation is maintained. Sara Lee stock traded in a P/E multiple range of 11 to 18 during the five years prior to the current restructuring program.
The current trailing 12-month P/E of 17.7 is at the top end of the range due to the decline in earnings during the initial phase of Sara Lee's Transformation Plan. For food companies experiencing restructuring changes, the Price-to-Sales (P/S) metric is appropriate. During the five years prior to the announcement of the Transformation Plan, Sara Lee stock traded in a P/S multiple range of 0.69 to 1.06. The stock is currently selling at a P/S multiple of 0.78 times trailing 12-month sales. The target price of $18 is based on a 1 P/S valuation on trailing 12-month sales."