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...
Have a thought or comment? Give us a call or email.
Scott Alaniz, CFA
Joe Chumbler, CFA
Rogers (479) 657-6940
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.
