Dear Mr. Berko:

Please tell me what you think of Sara Lee. In the past few years, when it was trading around $21-$22, you would not recommend the stock because you had a low opinion of management. Has your opinion changed?

The stock pays a good dividend, which was increased this year by 20 percent from 2003, and the company just bought Earthgrains bread, which is one of the best brands on the market. If you would recommend the stock I would have the courage to invest about $3,200 for my individual retirement account and buy 150 shares.

S.P., Springfield, Ill.

Dear S.P.:

Sara Lee Corp. (SLE-$22.01) traded in the low $60s in 1998 prior to splitting 2-for-1 in December of that year. Between 1997 and 1999, SLE traded at more than 21 times earnings, but Wall Street got tired of waiting for something good to happen and SLE’s price collapsed like a string of wet spaghetti as the price-earnings ratio tanked to 16.

Well, after five years of trading between $16 and $23, I’m told that the current $22 price could rise to the $32-$34 range in the next three years.  SLE is a $18.2 billion revenue company whose products occupy prime space on every grocer’s shelf. The company, best-known for its baked goods, also sells hosts of other name-brand food and non-food products such as Chock Full O’Nuts coffee, Ball Park franks, Hillshire Farms, L’eggs, Hanes, Wonderbra, Playtex, Sanex, Kiwi and Jimmy Dean sausage. In fact, 28 of SLE’s brand-name products each generate more than $100 million in annual revenues. It appears that SLE stock might be on the cusp of positive price momentum. It looks like product innovations are finally beginning to translate into good revenue gains and that revenues for 2004 may rise by 5 percent to $19 billion.

I’ve also been told to watch for a 15 percent improvement in SLE’s net profit margins in the coming few years – from 6.5 percent to 7.4 percent. And after the sale of Coach Leather, private counseling encouraged senior management to use the proceeds to triple the company’s esteemed bakery business, repurchase common stock, retire some debt and fund acquisitions (SLE recently bought Earthgrains for $2.9 billion) rather than buy the Chicago Cubs baseball team so company executives could have box seats at Wrigley Field. I’m impressed that management has also decided to use the proceeds from the sale of its tobacco business, $120 million a year for seven years, to further reduce debt.

In the past few years, management has done little to increase shareholder value. However, the company has reshaped and refocused itself around its three core businesses: food and beverages, intimates and underwear, and household products. The results may just be beginning to show. Therefore, I’m told that the shares may have good, conservative, long-term investment appeal.

Because my source has been wrong just once in the past 17 years, I’m convinced that he might be right. I’m told that shareholders’ equity could grow by 60 percent in the coming four years. I’m told that earnings may reach $2 a share from last year’s $1.49 and that the 75-cent dividend (yielding 3.4 percent) might reach $1 in within the coming four years. I’ve also been told that revenues should exceed $21 billion in that time frame and that none of these projections include potentially certain acquisitions.

So, yes, I’d be comfortable owing 150 shares of SLE. The share price has not responded well in the past five years, but earnings have increased annually since 1985 from 20 cents a share to an expected $1.56 this year and dividends have grown each year from 9 cents a share in 1985 to 75 cents this year.

The stock has a long-term average annual P/E ratio of 16.5 and if earnings are on track to reach$2 by 2008, SLE could trade at $33 a share. Including the dividend, SLE could have a four-year average; annual total return in excess of 15 percent. And that ticks my clock.

Many of my clients and I own shares company.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.