Sara Lee – Unloved and Undervalued? At first glance, Sara Lee (SLE - $14.00, 11.4% of sales to Wal-Mart) appears to be a quite unappetizing investment. A look beyond its near term maneuverings may reveal otherwise. It seems that Sara Lee has been in a continual restructuring mode, frustrating shareholders and fatiguing Wall Street. Indeed, shareholders have been punished over the past decade, watching their investment fall by a third, while stocks of leading consumer products companies like Procter & Gamble and Kellogg’s have nearly doubled in price.
Five years ago SLE was a mini-conglomerate, overloaded with brands and product lines in which the company was a bit player, with no apparent direction. Since that time the company has chopped, trimmed and pared its portfolio of brands. With the $2.1 billion sale of its Body Care business to Unilever and its Air Care business to Procter & Gamble, SLE is reaching the final stages of its restructuring. Once the dust settles on its asset sales, SLE will be a leaner, more focused and debt-free company with only three businesses that logically and naturally belong in the same portfolio - meat, bakery and beverages, and that can be easily valued.
SLE’s international beverage business (Senseo, Douwe Egberts) is the crown-jewel, accounting for about 1/3 of sales and much more of profits. Businesses with profit margins and growth prospects like these are worth closer to 2x sales (Unilever and Kraft are valued at 1.8x sales) or $9.00 per share. The meat and bakery businesses contribute about two-thirds of SLE sales. Lower margin and less favorable growth prospects mean these segments are valued at only about 1x sales (Flowers Foods trades at 1x sales) or $11 per share. Combined, that means that SLE could be worth as much as $20 per share versus the current $14 share price. Extra mustard: perhaps SLE’s board recognizes the disconnect also ─ the company plans to spend $3 billion to buyback nearly one-third of SLE stock over the next few years.
Sweet Tooth. Tootsie Roll (TR - $25.08, 23% of its $508 million in sales are to Wal-Mart). Husband and wife duo Melvin and Ellen Gordon took home sweet cash bonuses of nearly $3 million apiece in 2009. More on the highly profitable niche candy maker’s compensation practices here. Source: Chicagobreaking business.com
Costly Exit. Spectrum Brands (SBP - $27.45, 23% of sales to Wal-Mart), which entered and exited bankruptcy in 2009 owns brands such as Rayovac, Remington, Cutter and Repel, among others. It was costly for the company to rid itself of departing CEO, Kent Hussey, who ended up with millions in cash and perks according to this review by footnoted.org. The perk that adds insult to injury was that the company agreed to pay legal fees Hussey incurred in negotiating his separation agreement.
One of our favorite moments: When asked about Kraft's purchase of Cadbury and sale of the pizza biz, Buffett responded "I didn't like the Cadbury or pizza deals....We get mad when other people do dumb things with our money."
Putting his money where his mouth is, Warren Buffett sold 23% of his Kraft holdings during the first quarter of this year. Company reports.
Fast Facts: Dollar Tree, Dollar General and Family Dollar will altogether add 1,000 stores this year totaling about 8 million square feet. By contrast Wal-Mart U.S. will add 11 million square feet of space (including 1 million for Sam’s Club). Source: Company reports
Family Dollar’s recent investor presentation is worth a read – it highlights how the company is spending the piles of cash it has been generating, how it expects to lower its costs via improved sourcing and expand its private label offerings.
If Wal-Mart were a country where would it rank? As the 29th largest in the world, just ahead of Columbia which had $401 billion in GDP during calendar 2009.
Why CPG Companies May Load Up On Debt. Expect to see more consumer products companies refinance and borrow as much as they can. Seth Klarman, President of Baupost Group, one of the most successful hedge funds in the world, explains why in a recent Wall Street Journal interview:
“By holding interest rates at zero, the government is basically tricking the population into going long[buying] on just about every kind of security except cash, at the price of almost certainly not getting an adequate return for the risks they are running. People can’t stand earning 0% on their money, so the government is forcing everyone in the investing public to speculate.”
That demand for higher yields is a boon to corporate borrowers (and maybe not the best time to be a lender). Alberto-Culver (25% of its $1.4 billion in sales to Wal-Mart) has recently issued $150 million in unsecured, borderline junk bonds to investors at an interest rate of 5.15% for 10 years. That’s about 185 basis points more than it costs the U.S. Government for 10 year money. During more rationale economic periods, it would usually cost a company like Alberto-Culver 400-500 basis points more than the Treasury. Source: Company reports.
A Look Ahead. The lowly vending machine has had a makeover and offers a host of consumer products heretofore unavailable thru this channel with more innovation and products on the way. If you travel much, you may have seen the Body Shop’s vending machines offering skin care products at airports. Some sell shorts and sporting goods and toys. Read the article here. Source: NY Times
Why Giving Your Boss a Red Pen is a Bad Idea. Researchers have discovered that individuals reviewing reports, presentations, articles or grading papers are much more liberal with their markings when using a red pen than when using blue or black colored pens. It seems that holding a red pen activates one’s inner perfectionist, marking 25% more errors than when holding a blue pen. The extra edits are based on a psychological concept called object priming, which advertisers have long used to prod consumers to buy. Read the full article here. Source: European Journal of Social Psychology
The Hideaway Report. If you like exclusive adventure travel, you may want to consider membership in Andrew Harper, publisher of The Hideaway Report, a newsletter that the boutique travel agency publishes. The firm caters to high-end travelers searching for unique top-shelf properties.
The Last Word…
“Diplomacy works best with a carrier group sailing nearby”
-Ralph Wanger, Retired Portfolio Manager, The Acorn Fund
Have a thought or comment? Give us a call or email.
Scott Alaniz, CFA
Joe Chumbler, CFA
Rogers (479) 657-694
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