Massmart – Playing the Long Game in Africa

Walmart’s announced acquisition of 51% of Massmart has gotten a great deal of press, mostly focused on union/labor relations. Sure, Africa’s got economic, regulatory and infrastructure issues and acquisitions aren’t fail proof. But, if one looks beyond the thicket, a different view emerges. As the accompanying map illustrates, the U.S., China, India, and several assorted European countries can be tucked nicely inside Africa. So, this deal positions Walmart for multi-decade international growth with a management team that knows Walmart intimately, wants to work with Walmart and happens also to be one of the continent’s top retailers. A steady diet of capital and operational heft is fuel for the boom. Source: Flowing Data

SUPPLIER ROUND-UP

It’s definitely a seller’s market. The year ended with a flurry of financial transactions for CPG manufacturers. A combination of high cash on hand, low returns on that cash, and low organic growth rates are a boon for CPG companies looking to cash out. Expect more consolidation.

Unilever acquired Alberto-Culver for $3.7 billion, paying a multiple of 2.3x revenue, 14.7x Earnings before Interest and Taxes (EBITDA) and about 22 times earnings. The deal is part of Unilever’s efforts to refashion itself more along the lines of Procter & Gamble. Here’s a recent slide deck from Unilever outlining their strategy.

PepsiCo is acquiring two-thirds of Russian Dairy firm Wimm-Bill-Dann (WBD). This transaction is about getting distribution in Russia, similar to paying a cover charge to go into a seemingly popular nightclub. The transaction values Wimm-Bill-Damm (more here) at $5.4 billion. WBD earns about $125 million annually On $2.6 billion in revenue and PepsiCo expects $100 million in “synergies,” so call it $225 million in earnings. That’s a multiple of 24x projected earnings. The yield on the investment is 4.2% ($225 mil. / $5.4 bil = 4.2%) which is higher than the return PepsiCo is getting on its ample cash balances, so the transaction is accretive to earnings in CFO-speak. WBD’s forecast for 19% annual growth in EBITDA for the next 6 years seems a stretch, but, if achieved, could make this a great deal for PepsiCo.

And, the Original Barbarian at the Gate, KKR is buying Del Monte for $4.0 billion. KKR, in the first leveraged buyout since Lehman Brothers failed, is paying a little more than 1.0x sales, 6.3x EBITDA and about 13 times earnings for the $3.8 billion growth-challenged pet and food products maker. If all goes according to plan, this one will be flipped back to public investors in 5 years or less.

OF FINANCIAL INTEREST TO THE HIGH-INCOME EARNER

The $50k College Club

Two years ago, a mere 5 institutions charged more than $50,000 per year for out-of-state tuition, fees and room & board. Today, 100 institutions have topped the $50,000 mark. And, for the first time, a public school, University of California at Berkeley joins the list. If your child has aspirations to attend a top college, there are effective planning techniques to help mitigate these costs. Source: Paul Kedrosky’s Infectious Greed, The Chronicle of Higher Education

[My wife and I have already put one through college with two more on the way. So, two members of our family will be traveling, eating out and socializing with friends; the other two will be putting in long weekends and subsisting on Ramen Noodles - probably me and my wife. – Scott Alaniz]

Real Estate

Bill Ackman, a long-time activist investor in retailers and CPG companies (Target, Borders, Barnes & Noble and Fortune Brands) makes a compelling case for buying a second home or adding to your real estate portfolio in this slide deck.

[Many of the executives we work with have most of their assets in company stock and deferred compensation program(s) and perhaps only 5-10% of their net worth in real estate; done properly, addition of real properties can lower risk and improve their wealth and income.]

The Hot Hand

The decade’s top money manager, Bruce Berkowitz, operates in exactly the opposite manner of brokerage firms and mutual funds. His philosophies and a few investment ideas for your own portfolio are found in the Fortune profile.

Long Term Care

Rates for long-term care are on the rise. John Hancock asked state regulators for a 40% boost in premiums recently. Apparently, insurers underpriced the policies and are now raising rates to cover expenses. Kiplinger has an excellent overview here. “There are only three ways to cover the potential costs [of long-term care]: (1) Pay for it out of pocket, (2) figure out how to qualify for Medicaid or (3) buy long-term care insurance.”

[This issue is as much emotional as financial. Many of our readers have had to deal with or anticipate dealing with their parent’s healthcare issues. And, many of our readers come from working-class backgrounds, often being the first in their families to attain a college degree, climb the corporate ladder and succeed financially – they don’t want to watch their parents have worked so hard to accumulate become depleted. Each situation is different, but generally, those with a net worth exceeding $5 million can self-insure while those with net worth from $1 - $5 million should evaluate the policy options.]

INSIDE THE MARKETS

Super-Long Bonds

Companies and governments are issuing 50-year and 100-year bonds at what may become incredibly cheap rates. With investors earning nominal rates on their savings, the temptation of a higher yield is alluring, particularly to unsophisticated investors. With few exceptions, the risks far outweigh the rewards. Even a rise in interest rates of a few percentage points could create painful declines in the value of these bonds, preventing one from reinvesting at much more attractive rates. Source: The Globe and Mail

From the issuer’s perspective, this is a classic case of “heads I win; tails you lose.”

Three Stages of Delusion

Here’s a lengthy, but insightful discussion of financial crises. The best part is the thrice-recurring cadence of delusion by responsible parties. Source: The Big Picture; John Mauldin, Outside the Box, Dylan Grice

Random Gleanings

The US’ share of world's 100 tallest buildings is projected to decline from 80% in 1990 to 18% by 2012. Source: Bloomberg.

The home of the The Godfather, Don Corleone, has been listed for sale.

Tips from the Old Timer

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

–Warren Buffett, April 2009

The S&P500 is up 42% since Buffett made this comment.

Have a thought or comment? Give us a call or email.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

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 and at the time of this newsletter.

Hogs vs. Bama: Retailer Lessons; Anti-Aging Ice Cream; Sara Lee, Flowers Foods and More!

Alabama/Arkansas Revisited – The Business Lesson

We don’t like to re-open the wound, but oftentimes sports teams and businesses employ one strategy to build a lead or market share, then once the lead has been achieved, they change the approach, which often backfires. For 56 minutes and 42 seconds, the Arkansas Razorbacks led #1 rated Alabama. While Alabama’s performance undoubtedly had a lot to do with the outcome, Arkansas changed its offensive approach late in the game, discarding balanced play-calling (running the ball once and passing ten times). Without balance to keep the Alabama defense off-guard, the Tide forced two Arkansas turnovers to pull ahead.

It seems like Wal-Mart’s U.S. merchandising changes over the past several years are similar to Arkansas’ change in strategy late in the game. For over 40 years, Wal-Mart built its lead by relentlessly driving out unnecessary costs and offering the lowest prices on the widest assortment of national brands. A focus on higher margins, reduced assortment, and moving up-market eroded their lead. Now, a return to the original game plan could re-invigorate comp-store sales and put “points on the board.”

Schoewe’s Retirement

Tom Schoewe, Wal-Mart’s CFO is retiring. He’s highly respected among professional investors for his job in overseeing Wal-Mart’s finances and allocating capital. Though he forfeits 132,269 performance shares, 15,011 options (approximately $48.00 per share) are accelerated and vesting of 69,131 shares of restricted stock is accelerated and he is to receive $1,654,848 in a transition payment. His non-compete agreement was extended to 2014. Here’s the detailed SEC filing.

Top 5 CPG CEO Letters to Shareholders

One of the first things that Warren Buffett reads when evaluating a company is the CEO’s letter to shareholders. Today, few shareholder letters are written by CEO’s, even fewer are written for the shareholders, and hardly any are ever read by investors. Most are written PR types and are little more than bizblab. Here’s a few examples that directly address financial performance and the most relevant business issues with unusual clarity.

1) James Craigie, CEO, Church & Dwight, Shareholder Letter

2) Bill Johnson, CEO, Heinz, Shareholder Letter

3) Kendall Powell, CEO, General Mills, Shareholder Letter

4) William McComb, CEO, Liz Claiborne, Shareholder Letter

5) George Deese, CEO, Flowers Foods, Shareholder Letter

SUPPLIER ROUNDUP

We weren’t the only ones that thought Sara Lee was undervalued

Buyout giant KKR, has approached the Board of Sara Lee intent on purchasing the company, according to a NY Post story. Back in June, we crunched some numbers on what Sara Lee might be worth (more than its current stock price). KKR, of course is the original Barbarian at the Gate, kicking off consolidation in the CPG space with its buyout of RJR Nabisco back in 1989.

Here’s a good presentation by Flowers Foods (21% of $2.6 billion in sales to Wal-Mart) demonstrating how a company with low natural sales growth can produce impressive EPS growth with effective cost control and using cash flow to repurchase shares cheaply.

And here’s Clorox, looking to do the same

Clorox (CLX-$66.69) is selling its automotive care business (Armor All) and plans to use the proceeds to buy back its stock. For sure, Clorox got a great price on business, with a private equity firm paying 2.6x sales for the $300 million business. For Clorox, trading at 13x expected earnings, reducing its share count should produce a very adequate return. Clorox has a mixed track record with buybacks, having bought back stock during a market downturn in 2003 and recently repurchasing a slug of stock in 2007 at an average price around $60.00. Source: Bloomberg, SEC filings

From the Venture Capital front – Chocolate Manufacturer Ritter has invested in German startup Chocri. Chocri enables consumers to design their own chocolate bars, with a variety of chocolates and fillings; the customized bar is then shipped to the customer. Sure, the Internet enables a consumer to cheaply design their own candy bar, but how can the model scale? Does the investment signal that Ritter is boxed in by the confectionary giants? Source: NY Times.

AND FOR YOUR PERSONAL PORTFOLIO…

Read 6 rules for your portfolio and your career from one of Wall Street’s gutsiest (and richest) traders. Shameless self promotion: we are the only investment firm in Northwest Arkansas that employs rule # 6. Source: Ritholtz.com

Legendary Hedge Fund Manager describes current market as a Hostess Twinkie. His comments in the article will make you think twice about how your investment portfolio and 401(k) plans are positioned. Source: Pragmatic Capitalist

HMMM…

Former Friend Allegedly Tries to Extort Campbell Soup Heiress. Read Article

Hershey loses case to take twizzler.com domain from registered owner. Read Article

Unilever working with Ben & Jerry’s on anti-aging ice cream. Read Article

Quote of the Day:

"Some people are born on third base, and go through life thinking they've hit a triple."

-Barry Switzer, former head coach at the University of Oklahoma

Have a thought or comment? Give us a call or email.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

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 and Kimberly Clark at the time of this newsletter.

WMT Inventory Ramp; Counting Cars; InBev InDepth and More!

Three Things We Learned from Wal-Mart’s 2Q2011 Earnings

Though virtually all commentary surrounding the quarter focused on the recent past same-store sales performance, Wal-Mart has, for the first time in a long while, boosted inventory. Adjusted for their new accounting system, Wal-Mart grew merchandise inventories by $1.4 billion or 4% over the previous year (a rare reversal-see chart).

Inventory growth can be interpreted two ways: Either they’re planning for improved sales in the 3^rd quarter; or, they missed the sales budget by a wide mark in the 2Q. Anecdotal evidence suggests the former. Second, free cash flow is likely to decline during the second half of the year, meaning the company will boost borrowing to repurchase shares, so expect debt to build on the balance sheet. Finally, investors yawned at Wal-Mart’s $2 billion increase in quarterly sales. It took the company 20 years to reach $2 billion in 1982. Source: Company reports.

Satellites, Parking Lots and Sales Forecasts

Some Wall Street analysts are using satellite images to count vehicles in Wal-Mart parking lots in order to sharpen their quarterly sales forecasts. This is a novel idea for short-term forecasting, but might need a little fine-tuning as the first forecast was off. Source: CNBC

Why Sliced Bread Sales Took Off

Here’s a pretty good video by Seth Godin on marketing, using lots of good consumer goods examples. Source: BNET.com

AROUND THE HORN WITH SUPPLIER’S

AB-InBev – Noted Hedge Fund Manager Pitches the Stock

If you prefer deeper analysis than Jim Cramer’s superficial recommendations, here’s an uncommonly thorough thesis on Budweiser’s parent, AB-InBev. Skip forward to slide #51 for the AB-InBev analysis, unless you want to view the case for a continued homebuilding/mortgage meltdown. Source: Tilson Funds

Smart Money(?) Dumps Shares of Kraft

Longtime consumer goods investor Nelson Peltz has unloaded his entire position ($100 million-plus) worth of Kraft shares according to a recent SEC filing. Peltz, who made billions for investors in the can business (American Can, National Can), then later with the purchase and sale of Snapple, has sizeable stakes in Heinz, Dr. Pepper and Family Dollar Stores. Warren Buffett continues to pare his position in Kraft as well. Source: Marketwatch

Info Overload from Dr Pepper Snapple Group

The beverage conglomerate (13% of sales to WMT) has compiled what may be the world’s longest investor presentation at 23 MB and 185 slides; basically tells investors they are targeting 3-5% sales growth and expect to sell more drinks. A companion chart for data gluttons would be these beverage industry brand ownership slides courtesy of Michigan State University. Source: Company reports.

Wal-Mart Beef Supplier files for IPO

National Beef Processors (9.6% of sales to WMT) filed for an IPO. This might be a better deal for existing owners than new investors. Proceeds from the transaction will pay founding members. National is doing the deal to clean up a complicated and somewhat restrictive ownership and capital structure. The company doesn’t need the money to pay down its debt of around $270 million, which approximates the company’s annualized EBITDA. Source: SEC.

Wal-Mart Supplier is Called Out for Sweet Executive Pay

Smart Balance, which sells about $240 million of butter and related products annually (19% of sales to WMT) got called to the carpet for generous pay package to its departing COO. Facing sales declines, the company is in the midst of a major restructuring and repositioning as can be seen from their recent investor presentation. The shares have been nearly halved over the past few years and may be getting attention from potential acquirers. Source: footnoted.com

Will The Refinance Wave Boost Wal-Mart’s Sales?

Some 24 million homeowners have primary mortgages at interest rates above 6%. With 30-year mortgage rates at record lows and near 4.50%, refi activity is humming. Undoubtedly, refinancing will put cash back in consumer’s pockets. However, with the shock of declines in home values and investment portfolios still fresh in their minds, many consumers are likely to rebuild savings before they return to looser consumption patterns. So, it may be 2011 or 2012 before the consumers flock to the stores. Here’s our take on why refinancing now is advantageous. Source: Calculated Risk

FINALLY…

China Now Leads the World in Beer Consumption

Not sure if being number one in this category is good or bad. Source: The Economist

Diary of a Red-Eye Flight

If you travel extensively, you can relate to this. Source: NY Times.

Quote of the Day:

“Isn’t it funny when you walk into an investment firm, and you see all of the financial advisors watching CNBC — that gives me the same feeling of confidence I would have if I walked into the Mayo-clinic or Sloan Kettering and all the medical doctors were watching General Hospital…”

-Senior portfolio manager, UBS

Have a thought or comment? Give us a call or email.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

Rogers (479) 657-694

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.