2008 was a year in which the credit markets, usually considered boring compared to stocks and commodities, dominated the headlines. As liquidity evaporated in the bond markets, the stocks of public companies with meaningful levels of debt were negatively affected. The CPG industry was no exception, and though companies like Procter and Gamble and Johnson and Johnson stated on their conference calls that liquidity was not a concern, many CPG company stocks were penalized for having significant amounts of debt.
We recently examined the balance sheets of 42 of the largest public CPG companies and their 2008 stock performance. During the year, the market value of this group declined from $1.1 trillion to to $900 billion. We found that those companies with higher debt levels endured worse returns, particularly during the fourth quarter. The entire group of 42 CPG companies had an average ratio of debt-to-market value of 36% at the beginning of the year and the average stock performance was down 23%. Twenty-two CPG companies were down 36%, and these companies had a much higher average debt level of 46%. Companies in this group included Smithfield Foods, Jarden, and Constellation Brands. Shares of 20 CPG companies were down only 5% on average for the year, and had a more modest level of debt. This group was led by companies like J&J Snackfoods, Lance Inc., and Church & Dwight.
Spectrum Brands - CEO Continues to Feed at the Trough
Spectrum Brands had some goodies buried in the retention agreement for CEO Kent Hussey. The struggling CPG Company owns Rayovac, Remington, Spectracide, Repel, and Cutter among others. 19% of the company's $2.7 billion in annualized sales are to Wal-Mart. Ill-fated acquisitions in 2005 have burdened the company with a $2.5 billion debt load, which, with a lack of profits has helped pummel the stock from around $4.00 to $0.09 per share (98% decline). According to the company's recent 10-K, Hussey's retention agreement revealed: A $1.23 million incentive for "sticking around"; A 28% salary increase to $775,000 (did we mention that the stock is down 98%); $30,000 for personal use of the company jet; and, $31,000 in financial planning advice (presumably, the advice has been pretty good because Hussey is getting the incentive pay in cash and not in stock). Source: Footnoted.org
Technology Environment
$50 billion in worldwide sales of chocolate are dependent upon the cocoa bean. 70% of the world's cocoa is grown in Africa and it is that continent's largest export. However, yields on the cocoa trees have not increased in 3 decades, causing farmers to slash and burn existing rainforest to plant more cocoa trees to keep up with a soaring number of sweet-tooth's. As well, the trees have low resistance to disease (one-third of the crop is destroyed by disease annually). Scientists from Mars Inc. have discovered more genetically diverse varieties, potentially increasing yields. They must work fast - according to an expert, "[Africa's crop] could be devastated in as little as three years." Source: NewScientist
Coupon Comeback
Though less than 1% of all coupons issued by marketers have been redeemed by consumers, the lowly coupon is making a comeback. Last year was the first time since 1992 that redemption rates for coupons did not decline. Source: New York Times
Consumer Finances
It Hurts to be Rich - Nordstrom disclosed in its most recent quarterly financial filing that bad debt expense (loans written off) was up 72% for its nearly $2.0 billion credit card portfolio and that delinquent balances (loans 30 days past due) grew 33%. This is for a company that claims 90% of its cardholders are "super-prime" or prime. Oh, and Nordstrom plans to raise the interest rate it charges cardholders. Source: Footnoted.org; Company SEC Filings
Doomsdayers Have the Podium
The media needs something negative to focus on and retailers are an easy target. The Wall Street Journal reported "AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 26% of the 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years the firm had estimated 4% to 7% of retailers then tracked were at a high risk for failing." In a separate front-page article, the Journal cited statistics from the International Council of Shopping Centers saying that large retailers had 4,632 store closings in the 3Q and a prediction that 148,000 storefronts will be closed this year by retailers of all types, with a similar outlook for 2009. Source: Wall Street Journal
So That's What They Do With The Extra Giblets!
In a federal class action complaint, Perdue Farms, a Wal-Mart poultry supplier, is accused of stuffing extra hearts, gizzards and necks into its whole chickens...and thereby tricking customers into paying the regular per pound price for them. Source: Courthouse News Service
Extras
Double Speak -- "I am qualified to be Senator of New York." -Caroline Kennedy. Translation by hedge fund Longorshortcapital.com: My qualifications for this position include a fancy last name, not holding a full-time job, not holding any political office, and writing books for children. I am definitely not qualified to be Senator of New York." Source: Longorshortcapital.com
"Skybox to Big Duck - Pass The Ball": Nike founder Phil Knight has given hundreds of millions of dollars to his undergraduate alma mater, the University of Oregon (Ducks). "For his generosity he gets regular briefings from the football coaching staff, there's a headset in his suite to listen to play-calling [emphasis-added], and the school assigns an athletic director to cater to his needs." Source: Wall Street Journal
Quote of the Day -- "The pending merger with XM will offer unprecedented choice for consumers and create tremendous value for stockholders" says Sirius XM CEO Mel Karmazin. Since Mel said that, the stock is down 96 percent. Source: BNET.Com, Top 10 CEO Quotes of 2008
"Remember, your weapon was made by the lowest bidder."
--Murphy's Laws of Combat
Have an interesting thought or comment? Send us an e-mail!
Scott Alaniz, CFA Joe Chumbler, CFA
Fayetteville (479) 251-8400 Rogers (479) 366-4474
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.
At the time of writing, the authors held positions in Wal-Mart Stores, Inc.and Johnson & Johnson.
We recently examined the balance sheets of 42 of the largest public CPG companies and their 2008 stock performance. During the year, the market value of this group declined from $1.1 trillion to to $900 billion. We found that those companies with higher debt levels endured worse returns, particularly during the fourth quarter. The entire group of 42 CPG companies had an average ratio of debt-to-market value of 36% at the beginning of the year and the average stock performance was down 23%. Twenty-two CPG companies were down 36%, and these companies had a much higher average debt level of 46%. Companies in this group included Smithfield Foods, Jarden, and Constellation Brands. Shares of 20 CPG companies were down only 5% on average for the year, and had a more modest level of debt. This group was led by companies like J&J Snackfoods, Lance Inc., and Church & Dwight.
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Spectrum Brands - CEO Continues to Feed at the TroughSpectrum Brands had some goodies buried in the retention agreement for CEO Kent Hussey. The struggling CPG Company owns Rayovac, Remington, Spectracide, Repel, and Cutter among others. 19% of the company's $2.7 billion in annualized sales are to Wal-Mart. Ill-fated acquisitions in 2005 have burdened the company with a $2.5 billion debt load, which, with a lack of profits has helped pummel the stock from around $4.00 to $0.09 per share (98% decline). According to the company's recent 10-K, Hussey's retention agreement revealed: A $1.23 million incentive for "sticking around"; A 28% salary increase to $775,000 (did we mention that the stock is down 98%); $30,000 for personal use of the company jet; and, $31,000 in financial planning advice (presumably, the advice has been pretty good because Hussey is getting the incentive pay in cash and not in stock). Source: Footnoted.org
Technology Environment
$50 billion in worldwide sales of chocolate are dependent upon the cocoa bean. 70% of the world's cocoa is grown in Africa and it is that continent's largest export. However, yields on the cocoa trees have not increased in 3 decades, causing farmers to slash and burn existing rainforest to plant more cocoa trees to keep up with a soaring number of sweet-tooth's. As well, the trees have low resistance to disease (one-third of the crop is destroyed by disease annually). Scientists from Mars Inc. have discovered more genetically diverse varieties, potentially increasing yields. They must work fast - according to an expert, "[Africa's crop] could be devastated in as little as three years." Source: NewScientist
Coupon Comeback
Though less than 1% of all coupons issued by marketers have been redeemed by consumers, the lowly coupon is making a comeback. Last year was the first time since 1992 that redemption rates for coupons did not decline. Source: New York Times
Consumer Finances
It Hurts to be Rich - Nordstrom disclosed in its most recent quarterly financial filing that bad debt expense (loans written off) was up 72% for its nearly $2.0 billion credit card portfolio and that delinquent balances (loans 30 days past due) grew 33%. This is for a company that claims 90% of its cardholders are "super-prime" or prime. Oh, and Nordstrom plans to raise the interest rate it charges cardholders. Source: Footnoted.org; Company SEC Filings
Doomsdayers Have the Podium
The media needs something negative to focus on and retailers are an easy target. The Wall Street Journal reported "AlixPartners LLP, a Michigan-based turnaround consulting firm, estimates that 26% of the 182 large retailers it tracks are at significant risk of filing for bankruptcy or facing financial distress in 2009 or 2010. In the previous two years the firm had estimated 4% to 7% of retailers then tracked were at a high risk for failing." In a separate front-page article, the Journal cited statistics from the International Council of Shopping Centers saying that large retailers had 4,632 store closings in the 3Q and a prediction that 148,000 storefronts will be closed this year by retailers of all types, with a similar outlook for 2009. Source: Wall Street Journal
So That's What They Do With The Extra Giblets!
In a federal class action complaint, Perdue Farms, a Wal-Mart poultry supplier, is accused of stuffing extra hearts, gizzards and necks into its whole chickens...and thereby tricking customers into paying the regular per pound price for them. Source: Courthouse News Service
Extras
Double Speak -- "I am qualified to be Senator of New York." -Caroline Kennedy. Translation by hedge fund Longorshortcapital.com: My qualifications for this position include a fancy last name, not holding a full-time job, not holding any political office, and writing books for children. I am definitely not qualified to be Senator of New York." Source: Longorshortcapital.com
"Skybox to Big Duck - Pass The Ball": Nike founder Phil Knight has given hundreds of millions of dollars to his undergraduate alma mater, the University of Oregon (Ducks). "For his generosity he gets regular briefings from the football coaching staff, there's a headset in his suite to listen to play-calling [emphasis-added], and the school assigns an athletic director to cater to his needs." Source: Wall Street Journal
Quote of the Day -- "The pending merger with XM will offer unprecedented choice for consumers and create tremendous value for stockholders" says Sirius XM CEO Mel Karmazin. Since Mel said that, the stock is down 96 percent. Source: BNET.Com, Top 10 CEO Quotes of 2008
"Remember, your weapon was made by the lowest bidder."
--Murphy's Laws of Combat
Have an interesting thought or comment? Send us an e-mail!
Scott Alaniz, CFA Joe Chumbler, CFA
Fayetteville (479) 251-8400 Rogers (479) 366-4474
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.
At the time of writing, the authors held positions in Wal-Mart Stores, Inc.and Johnson & Johnson.
