2500!Thanks and Merry Christmas to our friends and colleagues.Hard to believe that it’s been one year since we launched this newsletter.We count over 2,500 subscribers and growing.Our following among business leaders on LinkedIn is equally gratifying – this newsletter group is now one of the largest in Arkansas.
No Lumps of Coal in Wal-Mart’s FY2010 Profit-Sharing Plan
Wal-Mart Associates have close to $11 billion in assets in the company 401(k) plan (see the SEC filing here). Gains in Wal-Mart stock (one-third of the plan assets) and the second largest holding, the Merrill Lynch Equity Index Trust, have so far clawed back about $1.0 billion of the $2.1 billion lost in the previous year. Though market conditions have been challenging, the company and associates have steadily plowed increasing amounts into the plan. Below we show a reconciliation of the plan’s activity over the past five years. Next year, look to see if any significant dollars move between plan choices since Wal-Mart has modified its menu of investment offerings. Source: Company filings
With M&A activity in the CPG industry picking up recently, we couldn’t resist passing along some deal details and our own two-cents.
TreeHouse Foods (15% sales to Wal-Mart; see our March 2009 analysis) will gain about $340 million in revenue and $14 million in net income via its acquisition of Sturm Foods.Wisconsin-based Sturm, the leading private label manufacturer of hot cereal and powdered soft drink mixes, gives TreeHouse the leading position in those double-digit growth categories.With $100 million of the $660 million purchase price funded from stock issuance, existing shareholders can expect about 8%-10% dilution; and a much more leveraged balance sheet as debt doubles to over $1 billion post-deal.
Our Take - TreeHouse Foods appears to be paying a lofty price for growth, and diluting shareholders and doubling debt to do so.
Jarden (20% sales to Wal-Mart) is buying Mapa Spontex, its first significant acquisition in over 2 years, for $500 million in cash.Mapa brings about $800 million in sales and our estimated $30 million in net income, and increases Jarden’s revenue and bottom line each by about 15%.Mapa (currently owned by French oil company Total S.A.), with its leading market positions in baby and home care categories in Europe, Brazil and Argentina, should meaningfully expand and diversify Jarden’s business, most notably increasing its non-US annual revenue by about 40%, or $680 million.
Our Take – Good things really do come to those who wait. Jarden seems to be buying a nice business with healthy cash flow at a reasonable price.
Chattem Inc. (30% sales to Wal-Mart) is being acquired by Paris-based sanofi-aventis for $1.9 billion cash, or about 20x expected 2009 net income of $90 million.Sanofi, with annual sales and income of roughly $40 billion and $5 billion, respectively, expects to enhance its ability to convert prescription medicine like Allegra to OTC with Chattem’s sales, marketing and distribution channels.
Our Take – Looks like a great deal for Chattem shareholders. Yes Chattanooga, there is a Santa Claus!
Procter and Gamble (15% sales to Wal-Mart) is buying Sara Lee’s Ambi Pur for $470 million.Ambi Pur, with estimated revenue and operating income of $382 million and $35 million, respectively, will further expand PG’s reach within the air care category, particularly in Europe and Asia.
Our Take - One down, dozens to go...
Window on the Economy
Homeowners with $1.0 million mortgages are defaulting at 2x the U.S. rate.Even with low interest rates, the carrying costs are forcing owners of McMansions to abandon ship.Unlike the bottom end of the housing market, pol’s in Washington won’t be chunking taxpayer-funded life preservers in now “underwater” gated communities – it’s not as politically palatable to bail out a million dollar homeowner.Read the full story here.Source:Bloomberg.com
Cocktail Party Fodder - Why Europeans are White
Fascinating theory on how the jet stream & eating cereal caused the unique skin de-pigmentation of Northern Europeans. Here’s the full article. Source: Knol
More Cocktail Party Fodder – Doug Kass’s 20 surprises for 2010
A hedge fund manager’s always interesting and provocative list of predictions:teaser – the economy provides a head fake in the first quarter.See the full list here.Source: Paul Kedrosky’s Infectious Greed.
It’s actually illegal to marry your first cousin in Arkansas, but legal in 25 other states, including California, New York and Connecticut (see the map and read the article here).Source: The New York Times
Innovation is great for science, maybe not so great for finance.We’ve reached a point where there are three times as many mutual funds, Exchange-Traded Funds ETF’s), hedge funds, and fund of funds than there are actual stocks to invest in (~22,000 vs. 6,700 U.S. stocks).
“Whenever there is a simple error that most laymen fall for, there is always a slightly more sophisticated version of the same problem that experts fall for.”
–Amos Tversky
“It's interesting that the [banking] industry has invented new ways to lose money when the old ways seemed to work just fine."
–John Stumpf, CEO, Wells Fargo
“A limited partnership is a business where the general partner brings experience to the situation, and the limited partners bring money.At the end of the limited partnership, the general partner has the money and the limited partners have the experience.”
–Anon
Have a thought or comment? Give us a call or email.
Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Procter and Gamble and Wal-Mart Stores at the time of this newsletter.
Since closing at an all-time high of 1,565 on October 9, 2007, the S&P 500 declined 56% and has bounced back 60% to 1,091 today.As we reviewed in January, CPG stocks have proven to be more resilient than the broader market, due primarily to the consumptive nature of the products sold, strong balance sheets and plentiful cash flow.Today, many of us with a significant amount of our compensation or wealth tied to the investment returns of these companies wonder what reasonable returns can be expected over the next few years.The performance of these stocks will likely influence our annual incentive compensation, retirement accounts and college savings plans.
At Boston Mountain, we have two priorities: developing financial planning solutions for clients, and evaluating companies for investment.We have found The Value Line Investment Survey to be one of several useful tools for the latter.Established in 1931 during the stock market crash, the service now publishes reports on about 1,700 companies in nearly 100 industries.Perhaps its most renowned proponent, Warren Buffet once commented regarding Value Line "I don't know of any other system that's as good… The snapshot it presents is an enormously efficient way for us to garner information about various businesses… I have yet to see a better way, including fooling around on the internet, that gives me the information as quickly."
Among other things, the Value Line service provides 3-5yr earnings and price projections on each company covered, as well as an underlying economic forecast for the same period.As the chart above suggests, Value Line believes that several CPG companies offer 3-5 year annual returns well above the historical stock market average of about 10% per year.Their underlying economic assumptions are average unemployment of 7%, modest inflation and 2.5% GDP growth.It’s important to note that these projections can serve as a “second opinion” of one’s own analysis, but should not be solely relied upon to make investment decisions.
Cherry Mash
If you work in the Candy category, you’ll find a treasure trove of information at this website–www.cherrymash.com, which is also the name of Chase General Corporation’s flagship candy bar.We were surprised to see this company filing financial statements with the SEC, as it only does about $3.0 million in annual revenue (Sales to Wal-Mart account for 17% of total).Nonetheless, the company has had strong performance, on the heels of the introduction of the new products such as the Mini Mash.On its website, the company reviews its colorful history, which includes being the 3rd oldest candy bar in the country (there’s even a song about the candy bar).The company purchased a business from renowned horror film actor Vincent Price’s father and also includes names of candy bars that did not do so well (opera stick, candy dogs, lulu bar) for the company.The father of current CEO, Barry Yantis, struck a deal directly with Sam Walton to carry the products, and the retailer has carried them ever since.The stock, with only 1.0 million shares outstanding, rarely trades.If interested, you may have to drive to headquarters in St. Joseph, Missouri and buy shares from someone in the parking lot.Source: company financial filings
Black and Decker CEO waives $20 million payday?
Kudos to the experts at footnoted.org for catching this nugget in the Black and Decker (BDK) 8-K filing; it seems that BDK CEO Nolan Archibald has waived his $20 million severance payment resulting from the change-in-control that will occur when BDK is merged with Stanley Works (SWK).When all his other compensation and potential gains from the deal are added back, he’ll make up the $20 million, and a wee bit more (about $70 million).Source: footnoted.org
Where Does Your 401(k) Plan Rank?
BrightScope.com enables you to see a ranking (and detailed data) on your company’s 401(k) plan.It appears that the calculation is slightly less complex than the computer model used by the Bowl Championship Series (BCS) to determine the best team in college football, but a noble effort nonetheless.Source: BrightScope.com
Forbes Highlights CPG Companies
The November 16th issue of Forbes is worth checking out.There’s an insightful article on National Presto Industries (NPK, 3% of sales to WMT) as well as recommendations on Supervalu (SVU), Hormel (HRL) and Campbell Soup (CPB) by columnist Vahan Janjigian.Source: Forbes.
Good commentary on the state of retailing entering the holiday season by Patricia Edwards.Source: storehouse partners.
While you are reading about the industry, PriceWaterhouseCoopers recently published a useful, if overly wordy report on the state of the CPG Industry.The executive summary is worth a read and be sure to check out the charts beginning on P. 11.Not surprisingly, the top performing companies increased their spending on SG&A relative to sales.
Deep Thoughts
An excellent article predicting that the wild fruit industry in Africa, home to some 3,000 species, is poised for domestication on a grand scale.Source: New Scientist
All I Need to Know About the Economy
Credit card direct mail offers are down 81% since 2006.How do you get consumers to spend, businesses to create jobs, and therefore the economy going without credit to prime the pump? Look at the data here.Source: Paul Kedrosky’s Infectious Greed
MENTAL BREAK – Odd CPG-Related News and Musings
Bad News for Gillette & Schick?
Gillette, of course, is owned by Proctor & Gamble (PG, 15% of sales to WMT), Schick is owned by Energizer (ENR, 21% of sales to WMT).An AOL story surfaced recently regarding a study in which The American Mustache Institute(AMI) found that mustached Americans earned more money on average than those with beards and those sans facial hair.The full white paper can be found here.This is pretty funny stuff, but also a great example of how newswires publish seemingly credible stories with no regard for fact-checking. That the AMI findings are self-serving is not surprising. As Warren Buffett opined “never ask the barber if you need a hair-cut.”
Table of Condiments That Periodically Go Bad
Hadn’t looked at a periodical table since junior high school, here’s a periodic table for condiments.Guacamole has a 1-day half-life, but Cheese Whiz apparently has no expiration.Click here for the full table.Source:Chartporn.com; Peltiertech.com
Mucho Pequeño Logo’s
According to this article from the MailOnline, scientists at Kellogg’s have figured out how to etch the company’s logo onto its cereal flakes.
And Finally, Doing Diligence
Here’s a few of our favorite lessons from the Madoff Ponzi schemer courtesy of Long or Short Capital.See the full list here.
•“If your investment manager has almost no volatility in his returns, either he is an annuity (and you are a moron) or he is lying (and you are a moron).An example of what to look for is if the monthly returns over 17 years looks like they were drawn with a compass (and likely were).”
•“If the auditor of your investment manager is a firm you have never heard of, or operates in a 15’ by 18’ shack in upstate NY or NJ, or is the brother-in-law of the principal of your investment manager, it is worth questioning the validity of the audit.Especially if your investment manager is the largest hedge fund in the world.”
•“If your excuse for getting defrauded out of all your money by not observing any of these rules is that a lot of other smart people fell for the same thing, consider the fact that these other smart people are actually not that smart.”
And Finally...
Working with/for Wal-Mart during the holiday season may feel a lot like what settlers coping with Alaska winters experienced: “settlers were always either preparing for winter or recovering from it.”
Have a thought or comment? Give us a call or email.
Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Wal-Mart Stores at the time of this newsletter.
“The object of war is not to die for your country but to make the other b_st___d die for his.”
–General George S. Patton
To paraphrase Patton, “the object of running a company is not to overpay for another CEO’s business, but to have other CEO’s overpay for yours.”
Kraft is proposing to acquire Cadbury for $16.7 billion (see Kraft’s justifying the deal here) and faces a Nov 9th deadline to put in a formal bid according to a UK Takeover Panel decision.Though no other bidder has yet to emerge, Cadbury’s share price is trading well above Kraft’s offer price, reflecting market expectations that another bidder will emerge or that Kraft will have to raise its bid to get more than a passing yawn from Cadbury shareholders.
Both companies are posturing like peacocks to make the best deal and are pulling out all the stops.Cadbury just reported interim results (here) that exceeded expectations & raised its outlook, putting pressure on Kraft, which is slated to report in early November. With a big deal on the line, it would be shocking and a strategic misstep if Kraft did not report a strong quarter.Why? Because a higher stock price means that Kraft can pay more for Cadbury.
The math:Kraft’s proposal values Cadbury at 22 times earnings and 12 times EBITDA.Adjusting earnings for the estimated cost saves ($625 million pretax) and additional interest expense ($450 million pretax) gets the multiple down to about 19 times earnings.That’s a great price for Cadbury shareholders, not so good for Kraft’s unless everything goes right with the integration and ongoing operation.
Financially, the deal is accretive to Kraft’s earnings, but accretion is a poor measure of return on investment (ROI).To get an excellent return on its investment, Kraft will need much more than $625 million in cost saves.Typically, the bidding company low-balls the cost save estimate, so that if something goes wrong (which it normally does), there is a cushion.With Cadbury, $625 million in cost saves already represents 6% of its revenues, at the high end of typical expense savings for CPG deals.As well, Kraft and Cadbury’s operations are more complementary than duplicative, making overlap minimal and casting doubt on the ability to achieve that figure without losing something on the back-end.The only way the deal works for Kraft owners is if the companies can fully leverage each other’s distribution networks.Source: company filings.
3 Things We Learned at Wal-Mart’s Analyst Meeting
Though Wal-Mart packed two days of presentations full of granular data, it’s helpful to take the view from 30,000 feet.
1.Sales performance in context.Wall Street is still unimpressed with Wal-Mart’s domestic sales performance (up a few percent).We look at it differently.It’s difficult to avoid market ups & downs when you are becoming the market. Sales for the entire U.S. retail industry will be down about 8% or $350 billion this year. Think about that number – it is kind of like locking the doors on every U.S. Wal-Mart and Sam’s Club store for a year, that’s a tremendous amount of lost sales for the industry.Taking market share while shrinking SKU’s and improving margins seems like a pretty good outcome for shareholders.
2.International: WMT is playing the long game.Acquiring and operating successfully in new markets has a steep learning curve and takes many years.Because of the difference in profitability between domestic and U.S. operations, Wall Street has some doubts about WMT’s ability to operate successfully outside the U.S.For WMT to get out of the “penalty box,” it must demonstrate that it can acquire and operate successfully in Asia – the world’s new growth engine.After extensive discussions with key managers, it looks to us like WMT is taking the appropriate steps at Seiyu (management changes, merchandising & improving price leadership) to be in a position to report improved progress over the next few years.Good news from Seiyu is a critical lever in changing investor’s view of WMT’s growth potential and thereby stopping the erosion in WMT's P/E multiple.It’s erosion of the P/E multiple (not lack of earnings growth) that has kept the stock from rising.
3.Recruiting: From Pariah to Power:In the old days, many executives viewed working for a retailer in Arkansas with all the enthusiasm of being sent to Siberia.And Wal-Mart, to use a sports metaphor, relied mainly on building from within and recruiting top “position players” in logistics, merchandising, etc.It was apparent from our meetings that Wal-Mart is now more like the USC Trojans in football, recruiting both position players and “athletes,” individuals with strong leadership, financial & management skills, and in the process creating a very deep bench with fresh energy and ideas, very necessary as the company transitions to a more global player.
Thanks Nutrisystem!
One week before trumpeting a new distribution agreement with Wal-Mart (press release), Nutrisystem (NTRI) granted Chief Marketing Officer Chris Terrill 60,000 shares of restricted stock (filed here on September 28).Though the shares vest over 4 years, the stock is up a cool $6.00 to $21.69 since the announcement, which is a nice $360,000 gain, (on paper, anyway) for Terrill, who was named chief marketing officer in June.Source: footnoted.org
Remarkable Graph of Target Store Openings
The interactive map of Wal-Mart’s store openings got tons of hits from our readers back in February (see it here).Now, the folks at FlowingData have added an interactive map of Target store openings since its inception.Source: FlowingData
Quote of the Day:
“We believe employment agreements help mitigate the economic hardship associated with unexpected termination.”
Well, employment agreements like these sure do.We saw this in the Clorox proxy statement filed this month.$1.5 billion of Clorox’s $5.5 billion of sales are to Wal-Mart.The comment is perhaps untimely in light of the backlash rippling through the country over executive pay.The millions of dollars that named officers would receive upon termination or a change in control will go a long ways towards “mitigating their economic hardship.” According to the plan, a named officer that is “unexpectedly terminated” would receive two times salary plus 150% of annual incentive compensation along with a few other minor perks.
Clorox is an excellent company; however, it is disheartening to see the board set low hurdles for compensating executives.We couldn’t help but notice the low hurdle to achieve 100% of target for the “economic profit”metric for annual incentive compensation.Theoretically, “economic profit” is a 50% factor in awarding bonuses, with sales growth accounting for the remaining 50% weighting.According to the 2009 proxy, to reach 100% of target, “economic profit” would have to be $359 million, which is below 2008’s economic profit of $363 million.
The other interesting item we noticed in the company’s financial footnotes was that the company maintains investments in low-income house partnerships.The partnerships develop and operate low-income housing rental properties.The company’s ownership is not entirely philanthropic; the investments provide the company with low-income housing tax credits.Though the benefit to Clorox is nominal, tax credits are more valuable than tax deductions as the credits provide a dollar-for-dollar reduction in federal income taxes while a tax deduction only provides a deduction in taxable income.Source: Company filings.
Local blogs of interest to the vendor community
Here’s a few blogs we’ve come across that may be of interest to you our readers.I’m sure there are some we haven’t discovered yet.If you have an appealing blog or newsfeed, tell us.
It’s no secret that sugar prices have hit an all-time high due to supply constraints, principally in India. Both the 10-year chart here and a 25 year chart here tell the story.Suppliers of sweetened snack-foods and beverage makers are in the crosshairs.Two years ago, Cott, a private label beverage maker that counts Wal-Mart as its largest customer, saw investors squash its stock as sugar prices spiked at the same time that Cott was caught between the big boys as they traded blows for shelf space in the midst of industry-wide declines in volumes for carbonated beverages.Two things you might not know about sugar:
Warren Buffett has recounted the story of Coca-Cola, which went public in 1919 at $40 per share, but was halved the next year as investors feared that high sugar prices would crush its earnings.That turned out to be a great time to buy the stock.We are not saying that Cott is the next Coca-Cola, but there’s a difference between a permanent change in business fundamentals and re-occurring commodity price swings.Coke turned out to be a pretty good investment over the next 90 or so years for investors.
And going way back to 15th and 16th centuries in England:Smiling at others became popular as a social norm thanks to Tudor aristocrats who smiled to show off their blackened teeth as proof that they “were rich enough to rot them on costly sugar.” Source: The Art of Conversation, Catherine Blyth
They Said It On trying to fix the economy quickly:“You can’t produce a baby in 1 month by getting 9 women pregnant.”
–Warren Buffett
“You can’t have a world where 50% of the people are dieting and 50% of the people are starving if you want stability.” –John Shelby Spong
"I've met a few people in my time who were enthusiastic about hard work. And it was just my luck that all of them happened to be men I was working for at the time."– Bill Gold.
Have a thought or comment? Give us a call or email.
Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Wal-Mart Stores at the time of this newsletter.
