A Few Good Thoughts...

2012-01-23T11:11:00.000-06:00

Wal-Mart: How Important is the Buyback?

Wal-Mart has grown EPS from $1.20 in 2000 to an expected $4.48 this year, a growth rate of about12% per year. Sales growth, understandably, accounted for about 60% of the increase, fatter profit margins contributed 9% and share buybacks caused 30% of the 12% EPS gain. In other words, WMT grew EPS 4% per year just by reducing its share count. Think about that for a moment.

Looking ahead, borrowing costs are the lowest they’ve been in 70 years, so the cost of financing future share buybacks pales in comparison to the cost during the past decade. Even more attractive is the fact that Wal-Mart shares are far less expensive today (in terms of earnings that can be purchased for each share that is acquired), than they were during much of the past decade, making future buybacks even more accretive to shareholders.

What’s Driving EPS Growth?

Overestimating “Made in China”

Despite pre-conceived notions, Goods and Services from China accounted for only 2.7% of U.S. consumption. Read more here at The Big Picture.

CPG Buyouts

Prognosticator calls for CPG Stalwarts International Flavors & Fragrances and Kellogg to get acquired this year. 15 Surprises for 2012

Weekend Reading on Retail/CPG Industry:

Short-Seller on Sear’s Slow-Motion Liquidation

The Accident That Started the Cereal Business

More Useless Cocktail Fodder on Wal-Mart’s Size

The Cheeseburger – Modern Supply Chain Miracle

Godin on the end of the Mass Market

Groupon – Questioning The Business Model

Green Mountain Coffee Shares Implode – See the Slide Show

FINANCIAL PLANNING

How a CPA’s Dad was Defrauded. Just because assets are in a Trust doesn’t make them safe. If you are helping your parents with their finances, you may want to read this article. It’s a very intriguing story which illustrates why trust isn’t enough for financial relationships; As Reagan said, “Trust, but Verify.”

A Few Useful Financial Planning Charts

Tax Rates

Investing Fad’s & Themes

Interest Rates

STOCKS, BONDS AND MARKETS

A New Year brings in predictions, most wrong and many harmful. Instead, here’s the most succinct and sensible guidepost for the current environment we’ve seen, courtesy of Mr. Buffett. When asked about his investment activity in the 3Q2011 on CNBC (Nov 14, 2011):

“…there are lots of attractive stocks. I can’t think of a lot of attractive bonds and I certainly can’t think of a lot of attractive currencies to stick in my pocket.”

On Uncertainty:

“The world’s always uncertain. The world was uncertain on December 6^th, 1941, we just didn’t know it. The world was uncertain on October 18^th, 1987, you know, we just didn’t know it. The world was uncertain on September 10^th, 2001, we just didn’t know it. The world – there’s always uncertainty. Now, the question is, what do you do with your money? And if you – the one thing is if you leave it in your pocket, it’ll become worth less – not worthless - worth less over time. That’s certain – that’s almost certain. You can put it in bonds and then you get a certain 2% for 10 years and that’s almost certain to be less than the decline in purchasing power. You can put it in farms and the farms will probably keep growing corn and soybeans and they’ll grow it whether, you know, Italy has trouble tomorrow or not. It’s very interesting to me, if you own a farm and somebody said, you know, Italy’s got problems. Do you sell your farm tomorrow? If you own a good business locally in Omaha and somebody says Italy’s got problems tomorrow, do you sell your business? No. But for some reason, people think that if they own wonderful businesses indirectly through stocks, they’ve got to make a decision every five minutes.”

Boston Mountain Money Management, Inc., of Rogers, Arkansas is a financial planning firm for executives. Our clients typically have sophisticated financial planning needs and/or $500,000 or more in investable assets.

Have a thought or comment? Let us know.

Scott Alaniz, CFA
scott@bostonmmm.com
Joe Chumbler, CFA
joe@bostonmmm.com
Rogers, AR 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, Inc. at the time of this post.

Wal-Mart Shareholders' Meeting; Essential Investment Reading

2011-06-10T11:20:00.004-05:00

NBA Finals and the Wal-Mart Shareholders Meeting

We toured new store concepts and visited with several officers of Wal-Mart last week. With Walmart's growth prospects on our mind and the NBA finals in full swing, we're reminded of the Boston Celtic basketball dynasty of the 1950s and 1960's. The Celtics won 11 championships in 13 years, unmatched by any pro sports team. More than just having a talented lineup, they had a formula. That formula was to force their opponents to take lower-probability shots, usually contested and farther from the basket, while the Celtics used an effective passing game to take high percentage shots near the basket. Walmart, via the use of EDLP, great merchandising, and logistics, had a similar formula, taking lots high percentage shots, or investments, and forcing their competitors to take lower percentage shots. This was especially effective in expanding the discount stores and supercenters.

Prospectively, is Walmart still taking high-probability "shots" and forcing its competition to take low probability "shots"? We visited three concepts - Walmart Market, Walmart on Campus and Walmart Express, and, no surprise; each store looked really good, and seemed to be an appropriate fit for the target market. While we don't know how these concepts will evolve, it is clear that it will be years before enough square footage is added to move the earnings needle. More importantly, we observed that Walmart is investing significant energy, time and talent to grow the company. Serving rural markets and operating smaller, leaner grocery stores should be high percentage shots, layups really, for Walmart. Walmart on Campus is an intriguing concept, has potential, and could serve as a prototype for WMT to display agility in merchandising as it begins its urban assault.

Turnover in Shareholder Base

Several publications have touched on the fact that Walmart's ongoing buyback has increased the Walton Family's ownership of the Company from 38% to 48% over the past decade or so. Investors should also be aware that the shareholder base has transitioned from growth investors to value investors, who tend to have a longer term view and like to buy bargains. Here's a good example of how a value investor "values" shares of Wal-Mart

Top Readings in Finance for Busy Executives

The Seven Immutable Laws of Investing - or, where NOT to put your money now. Read it here.

Seth Klarman 2010 Client Letter - How to really manage investment risk. Read it here.

Decoding 401(k) Mutual Fund Brochures - a short, tongue-in-cheek guide

The Last Word

"When he writes a check, the bank bounces."

- Bob Davie, referring to Dallas Cowboys owner Jerry Jones

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.

2010-12-28T12:08:00.011-06:00

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

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

2010-10-07T10:30:00.010-05:00

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

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

2010-08-23T15:19:00.007-05:00

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

WMT Recap, Roth IRAs, Diageo PLC, HELE, Scotts and More

2010-07-13T08:36:00.025-05:00

Role Reversal: Doug McMillon's Billion $ Question

After the shareholders’ meeting, Wal-Mart met with us and other members of the professional investment community. At the Saturday morning meeting, Wal-Mart invited a couple of analysts to answer questions from its executives.

Doug McMillon, CEO of Wal-Mart International, asked in regards to the stock “is the street missing something?” In effect, he was asking what’s on the mind of every associate that has put in long hours and owns a boatload of the stock, which is “what’s gonna get the stock moving?”

As our readers are painfully aware, Wal-Mart stock has languished for over a decade despite impressive financial performance (read our explanation here) – more than doubling sales and EPS over the period, the last couple of years of which happened to be a worldwide financial meltdown.The answer to what will get the stock moving is simple.

Source: Company reports

Clearly, Walmart U.S. is the cash cow and International is the growth vehicle. But, the growth vehicle, even at $100 billion in revenue, only accounts for 19% of total operating income. So it is not big enough (relative to the total company size), nor can it grow fast enough to move the stock price meaningfully higher on its own at this moment.

For example, 10% growth from Walmart International adds 2% to the company’s overall growth rate. The company can also add another 1%-2% to its EPS growth rate by buying back shares. That gets us to 3-4% growth. Combined square footage growth at Walmart U.S. and at Sam’s adds another 1-2% to the total, bringing us to 4-6% companywide growth, potentially.

At a Price/Earnings Ratio (P/E) of 12 times this year’s estimated earnings of $4.00 per share, the stock is inexpensive. However, the 12 P/E is twice the growth rate (4-6%). An old rule of thumb is that paying a P/E of 100% - 150% of the growth rate is fair. Thus, in the near-term investors will only bid the shares up if there is a higher growth rate. That must come from same-store sales growth. With a base of $300 billion in annual revenues, growing same-store sales is the largest, most powerful lever for earnings growth and hence the stock price. Without same-store sales growth, the stock is unlikely to budge. Grow same-store sales and investors should respond by bidding the shares higher. Alternatively, Wall Street may value WMT higher if International and Sam’s were spun out, an analysis we’ll save for an upcoming issue. Source: Company filings

Bonus: Personal Finance Insight – Roth IRA Conversions for Executives

Misinformation regarding Roth IRA’s abounds. A Roth conversion can be a savvy move for those with very specialized situations or a financial train wreck for others. See our most important criteria for success plus a case study here.

Diageo PLC Pours Whisky into its Pension Fund

In an effort to shore up the deficit in its pension plan, the world’s largest whisky producer and Wal-Mart supplier has contributed via a partnership up to 2.5 million barrels of maturing whisky as an asset to fund retiree benefits. If the cash pension benefits come up short, at least retirees can drown their sorrows. The agreement filed with the SEC can be viewed here. Source: Plansponsor

Have Your Cake and Eat it Too

Helen of Troy Ltd. (18% or $116 million of $648 million total sales to Wal-Mart) sells products under the Brut, Sea Breeze and Vidal Sassoon brands among others. It’s CEO, Gerald Rubin, has a simple bonus plan. He owns 11% of the company and has collected about 11% of the entire company’s pretax profits over the past three years – $13 million to Mr. Rubin, other shareholders, not so much. Source: footnoted.com, company filings.

Paris, France to Marysville, Ohio is not a Lateral Move

Scotts Miracle-Gro (14% or $441 million of its $3.1 billion total sales to Wal-Mart) is paying Claude Lopez $100,000 to move from Paris, France to the Company’s Headquarters in Ohio to serve as president of global sales. Scotts threw in a hefty salary, plane tickets, company car, tax planning and other assorted perks. Source: footnoted.com

The Big Picture – Inflexion Point in China

Global retail and CPG companies are betting billions on the Chinese economy to deliver much needed growth to their businesses in the ensuing years. Evidence is mounting that China may be closer than many think to becoming a consumption-driven economy versus a production and export-driven economy. Thirty years of a one-child per family policy is now limiting supply into the workforce which, combined with the exhaustion in number of surplus agricultural workers transitioning to factory jobs, is resulting in a sharp rise in wages. Spending growth for consumer products should follow. Source: Financial Times

The Last Word

Nice little write-up on how some consumer products were named. Source: From Altoids to Zima: The Surprising Stories Behind 125 Famous Brand Names, Readers Digest

Why You Always Almost Win At Gambling

Manufacturers of slot machines use a technique called clustering to create a high number of failures that are “near wins.” Nearly hitting the jackpot induces the player to continue playing because they falsely believe that they have a good chance of winning. Scientists at Cambridge discovered that “the brain responds to near miss gambling outcomes in much the same way as it does to winning.” Source: Journal of Neuroscience, Scienceblogs.com

Quote of the Day

“Make a bet every day, otherwise you might be walkin’ around lucky and never know it.”

-Jimmy Jones

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

Sara Lee, Tootsie Roll, Spectrum Brands, and More!

2010-06-01T14:26:00.006-05:00

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.

Report From Berkshire Hathaway Meeting. Omaha's Qwest Center was full by 7:30am on Saturday, May 1, as shareholders anxiously awaited a day of Q&A with Warren Buffett and Charlie Munger. To our delight, the two did not disappoint, answering nearly 60 questions off-the-cuff with wisdom and candor that reflected their decades of life, business, and investment experience.

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.

Hershey, William’s Sonoma Tussle over Brownie Pan. Hershey is suing William’s Sonoma to stop the sale of a brownie pan that Hershey claims is shaped like a Hershey Bar. Source: Associated Press

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

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 Berkshire Hathaway, Procter and Gamble and Wal-Mart Stores at the time of this newsletter.

Wal-Mart's 10K; eLayaway.com; Hamilton Beach and More!

2010-03-31T16:47:00.000-05:00

Wal-Mart 10-K Details

Wal-Mart filed its form 10-K with the SEC on March 30^th. Though we saw new no notable financial disclosures or changes, the company updated some exhibits that we haven’t seen in awhile. Specifically, Wal-Mart tightened up its “Covenant not to Compete” which was last filed along with its 2004 10-K. Mostly standard stuff, but key changes include:

The agreement maintains a 2-year restriction before working for a direct competitor, but added a clause to not “participate in any other activity that risks the use or disclosure of Confidential Information”
An agreement to assist and cooperate in any future agency investigation or litigation
If there is a dispute regarding the agreement, the Officer agrees hold harmless Wal-Mart’s individual directors, officers, employees and representatives.

As well, the company included a detailed exhibit on its Officer Deferred Compensation Plan which puts a fine point on the terms and restrictions of the plan, and provides some insight into how officers are compensated.

Updated Infographic on Wal-Mart Growth: The popular map has been updated to include Sam’s Club and dynamically maps store growth from 1962 thru 2010. Here is another potentially useful chart on Wal-Mart that cleanly displays some key financials that are often overlooked by the mainstream financial media. Source: FlowingData, SeekingAlpha

Layaway, Float, and Fees

eLayaway.com is riding the crest of the great consumer belt-tightening of 2009. The company offers an online installment plan for consumers shopping online. The pitch: don’t run-up your credit card balances and plan and save smarter. Already, some 75,000 consumers and 1,000 merchants use the company’s “patent-pending” layaway system, hatched 5 years ago. It’s too early to call whether the concept fades like cheap fabric when the economy rebounds, but the company has a great formula for making money.

Here’s how it works: A shopper buys an Apple MacBook Pro for $1,599.00 online. Shipping, taxes and fees bring the total to $1,785.21. Next, eLayway.com begins transferring 10 monthly payments of $178.52 from the shopper’s bank account into its own account. Once the product is paid for in full, eLayaway.com transfers the funds to the retailer (Apple’s) bank account, and the retailer ships the MacBook to the customer. eLayaway.com makes a sweet 1.9% fee on each purchase and earns interest on the “float” while taking no inventory or credit risk. Hmm…is this a glimpse into Wal-Mart’s banking business when and if it materializes? Source: Newsweek; eLayaway.com

Double-Dipping

Hamilton Beach (HB), the manufacturer of kitchen appliances like blenders & toasters is a big supplier to Wal-Mart with almost 38% of its $1.3 billion in sales sold thru Wal-Mart’s stores. The compensation of its recently retired President, Michael Morecraft, recently caught the attention of a national financial sleuthing service. Morecraft took home $1.1 million running Hamilton Beach (which had a good year), but was paid another $1.5 million in “consulting fees” by HB’s corporate parent, NACCO Industries (NC), for advice related to the operation of the company’s kitchenware retailer, The Kitchen Collection. The company suspended incentive compensation for all employees in 2009. Source: footnoted.org

The Consumer and Economy

Though the stock market has rallied, it may be a bit premature to pop the corks. Bank of America (BAC), which is currently foreclosing on about 7,500 homes a month, will increase that rate to about 45,000 homes per month by the end of this year as noted at an obscure homebuilding conference in California. BAC thinks that foreclosure activity will peak late this year and trend down in 2011. Read more here. Source: Calculated Risk, Irvine Housing Blog

Mobile Commerce

It’s probably worth paying attention to what legendary venture capitalist John Doerr has to say and where he’s investing his money – he’s made a fortune picking the right technology companies to back, including Amazon and Google (see his portfolio here). One company to watch is shopkick.com. Early Internet applications changed a lot of things. They added access to great troves of information and changed how companies operate and communicate and how people communicate. Now, applications are changing the way consumers buy and do stuff. Mobile Commerce applications are aflame in Silicon Valley. The article is a bit of an ad for Apple, but worth the read. Source: techcrunch.com

Synchronized Flushing

Here’s a staggering graphic from EPCOR, a Canadian water utility, showing the spikes in water usage during breaks in the recent Olympic Gold Medal hockey game. A bit uncomfortable for advertisers, we think. Source: Patspapers.com

Road Trip to Omaha

As part of regular due diligence that we do on investments (company site visits) as well as to absorb some investing wisdom from Warren Buffett and Charlie Munger, we are going to the Berkshire Hathaway shareholder meeting on May 1st. If you like 80’s 8-track music, Cheetos, and don’t mind being trapped in a car for six hours discussing sophisticated financial modeling, join us on our road trip to Omaha. In addition to McLane, the grocery supply chain services company acquired from Wal-Mart for $1.5 billion in 2003, Warren Buffett is a big owner of consumer product companies like Kraft, Coca-Cola, Procter & Gamble, Johnson & Johnson, Nestle and Wal-Mart. Here’s an excellent analysis of the investment merits of Berkshire Hathaway by Jeff Bronchik at Los Angeles investment manager Reed, Conner & Birdwell. Speaking of Buffett, a recent Bloomberg story noted that Berkshire Hathaway can borrow money at a cheaper rate than the U.S. Government pays!

But We’ll Make it Up On Volume

According to the U.S. Budget for 2011 (see page 99), the folks at the U.S. Mint plan to address a cost issue. Because of high metals prices, it costs the U.S. 1.8 cents to produce a penny and 9 cents to produce nickel. Though having managed to lose money on every one of these coin produced over the past few years, the chaps in Washington propose using cheaper materials to produce the coinage and hope to save $150 million a year. Source: Paul Kedrosky’s Infectious Greed.

Since politicians are such easy targets, a few quotes are in order…

“One who expresses a minimum of thought in a maximum amount of words.”

Abba Eban

“The first act of the professional politician is to accuse the other side of being professional politicians.”

William Vaughan

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 Procter and Gamble and Wal-Mart Stores at the time of this newsletter.

Wal-Mart, P&G, NBTY, Crystal Bridges and More!

2010-02-28T10:03:00.000-06:00

Wal-Mart: What’s Driving ROI?

At a high level, retailing is similar to, but far less complicated than, banking. In banking the 3-step mantra is “get it in, get it out, get it back,” i.e., collect deposits, lend the deposits out, and make sure you get paid back. In retail, only the first 2 steps apply: get it in, get it out, i.e., get the right merchandise in at the right time and place, and sell it quickly (at the right price).

Doing More with Less: Inventory as a Percent of Sales at Wal-Mart (over 40 years)

Source: Company reports

Wal-Mart perfectly illustrates this concept in its Return-On-Investment (ROI) calculation. Though ignored by most, WMT provided its ROI on the last page of its financial press release, clueing investors in to the return the business is producing. In FY2010 WMT produced a ROI of 19.3%, same as last year, and very good by any standard. The trick is not only to grow sales, but to grow sales while maintaining or even increasing ROI. How do they do it? By making sure that assets don’t grow faster than sales or profits. As the accompanying graph illustrates, a prime lever has been reducing inventories as a percent of sales (or, increasing “turns”). Sure, the moves into grocery, Sam’s and different formats affect the calculation, but the prevailing trend is crystal clear. And 2010 was another exercise in asset efficiency as WMT again decreased its inventory-to-sales ratio.

Financially, here’s why this measure is relevant to investors. In the last decade, WMT has added $350 billion in sales to its base, while needing a mere $14 billion in incremental inventory investment. For perspective, in FY2000, WMT did a little more than $150 billion in sales on $19 billion in inventory. Driving the inventory-to-sales ratio down from 12.4% to 8.2% over this period had a dramatic effect on financial performance and was not at the expense of net profit margins (actually up 30 points over this period). Had the company not improved its efficiency, ROI would have been meaningfully lower and the company would have produced far less cash for dividends, buybacks and new stores. SKU rationalization is not a one-and-done occurrence, but is here to stay.

Pampers in China

Must reading if you work in this category or in emerging markets; an excellent article on P&G’s experience selling diapers in a market where the product was not a cultural norm. Issues raised in the article lit up the comment board and it’s worth a glance as well. Source: BNET.com

The 300% Markup, a Primer on the Rent-to-Buy Business

Here’s great perspective in this commentary on a business that competes with Wal-Mart in categories like electronics and certain home furnishings. In essence, rent-to-own companies maintain minimal SKU’s, mark the items up 100%, but the real price is 48 or more monthly payments that tally 4x the price. If a TV wholesales for $1,000, the payments total $4,000. Source: Bronte Capital

Do Board Directors Listen to Shareholders?

The proxy statement of Wal-Mart supplier NBTY, Inc. (18% of sales to WMT, operates Vitamin Shoppe stores, sells Natures Bounty, Sundown & Rexall nutritional supplements) had this morsel in its proxy that doesn’t go down so smoothly. “…After the mail is opened and screened for security purposes, it will be logged in, and (other than mail that our General Counsel determines to be trivial or obscene) then forwarded to the particular Director identified, or to the Board as a whole, as requested in the stockholder’s correspondence. Trivial items will be delivered to the Directors at the next scheduled Board meeting. Obscene items will not be forwarded.” Nice to know that there’s a process in-place ensuring that the directors see all the trivial items. On the subject of nutritional supplements, here’s a busy, but useful graph positioning various supplements based on scientific evidence. Source: Footnoted.org

Econ 101

Excellent charts on trends in unemployment, the housing market and the looming wave of foreclosures. The bottom line is a seismic shift in consumer priorities─ consumer’s now view paying off their credit cards ahead of paying off their mortgages according to this study by TransUnion. In the short term, this is probably good for most retailers, when the day of reckoning comes spending on discretionary items gets walloped again. Source: American Observer, Calculated Risk, and TransUnion

Though stale, incomplete, and probably wrong, the government has just published statistics for online retail sales. The categories of sporting goods and books & magazines saw the biggest gains. For data geeks only.

Random Walk

Texting is pervasive with many adults and teens glued to their mobile devices. Here’s a new look at the dangers of walking and texting. The politically-correct term is “inattentional blindness” which means we are oblivious of our surroundings when staring at a screen. Early solutions ─ In London, lampposts are being padded while in Finland “some crosswalks now display red and green lights on the pavement itself, so texters looking down know whether it’s safe to cross.“ Source: Book of Odds

Musings

Warren Buffett’s Letter to Shareholders is available here and is required reading for anyone interested in improving their business communication skills.

Where do bars outnumber grocery stores?

Why music has gotten louder? Intriguing look at the manipulations sound engineers make.

Sneak Peek at Crystal Bridges

If you haven’t done so, check out the progress at Crystal Bridges. Compton Gardens is the perfect place to take a 20 minute relaxing stroll to an observation deck that offers an incredible view of the construction in progress. Better yet, give Jamey McGaugh a call at 479-418-5725 and ask if he will accompany you. An assistant to Associate Director Sandy Edwards, he can provide not only an insightful narrative of the current progress and plans, but also tell you about the upcoming corporate sponsorship opportunities.

Oil, Cash for Clunkers & Healthcare

Oilfield math from an oilfield worker: A clunker that travels 12,000 miles a year at 15 mpg uses 800 gallons of gas a year. A vehicle that travels 12,000 miles a year at 25 mpg uses 480 gallons a year. So, the average Cash for Clunkers transaction will reduce US gasoline consumption by 320 gallons per year. They claim 700,000 vehicles so that's 224 million gallons saved per year. That equates to a bit over 5 million barrels of oil. 5 million barrels is about 5 hours worth of US consumption. And, 5 million barrels of oil at $70 per barrel costs about $350 million dollars. So, the government paid $3 billion of our tax dollars to save $350 million. We spent $8.57 for every dollar we saved. We are pretty sure they will do a great job with our health care, though.

The Last Word

Response to an executive who was willing to overpay for an acquisition because it was small and therefore would have little effect on shareholders:

“Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”

—Charlie Munger (Warren Buffett’s business partner)

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 Procter and Gamble and Wal-Mart Stores at the time of this newsletter.

Graham Packaging, Kraft's 401k, Nestle Buying Heinz?, Hanesbrands and More!

2010-01-30T10:37:00.000-06:00

All Packaging, No Present?

Graham Packaging, which manufactures plastic containers for consumer products, is set to become publicly-traded under the symbol GRM (read the SEC filing here). Graham sells about $2.2 billion worth of containers to a who’s who of CPG companies with PepsiCo its largest customer (11% of sales).

Reviewing the financials, the company has been spruced up for its IPO with traditional techniques like writing down asset values (reduces depreciation expense) and lowering capital expenditures (makes the business appear less capital-intensive). The IPO provides a nice payday to the private equity owners (paid for by investors in the IPO) as evidenced by this disclosure in the SEC filing:

“The remaining proceeds will be used to make a one-time monitoring fee payment of $26.3 million to Blackstone and $8.8 million to the Graham Family in connection with the termination of our Monitoring Agreement”

The Blackstone Group acquired the company in 1998, so the investment is a little long in the tooth for private equity companies as the modus operandi is to be in and out of an investment in 5 years. Post-IPO, the company will look the same as before, shouldering a heavy debt load, facing minimal growth prospects and still controlled by an entity with a history of paying itself exorbitantly. The company is trying to sell shares to the public at 12.5x earnings. Pass. Source: Company Filings.

Good News for Retailer & Vendor 401(k) Plan Participants

As has been widely reported, Wal-Mart‘s 401(k) plan has been under fire. Lawyers have been busy pursuing other big profit-sharing plans as well. Kraft was in the crosshairs, but a Federal Judge just threw out the case because the company had taken steps to lower expenses of its investment options. The bottom line is that the increased scrutiny is forcing companies to add low-cost investment options to the menu. Winners: plan participants. Losers: brokerage firms, mutual funds. The seemingly small annual savings of only ¼ to ½ percent in your mutual fund costs adds up to thousands of dollars at retirement. Source: Planadviser.com

ECON 101

Ironic, isn’t it? Foreclosure.com, a real estate site tracking the housing market, filed for bankruptcy in West Palm Beach, listing $9.1 million in assets and $27.5 million in debts. Source: Courthouse News Service

Don’t bring this to Starbucks and broadcast your reading preferences but the latest issue of the Coin Laundry/Dry Cleaning Journal relays that the consumer is still reeling, noting that many are laundering less frequently and over-loading their washers/dryers to squeeze more out of each dollar. Traffic is generally down 5-10% at Laundromats, long considered one of the most recession-resistant businesses. Laundromat owners are nervous that college students’ use of P&G’s Swash & Go instant clothes refresher may hurt business.

Just Walk Away. A worthy podcast shows shifting consumer attitudes of the middle class from “save my house at any cost” to “get me out with the least loss.” Source: NPR Planet Money

Haggle. Washington Post has an insightful article on how major companies are caving in to consumers haggling for lower prices.

Merger Mania

On the heels of the Kraft/Cadbury deal (read our analysis here), trading in options of Heinz have been active. Speculation is that it’s Nestle’s turn to buy a company. Source: BusinessWeek

Around The Horn

Quarterly earnings are upon us. Multi-Color Corporation (Nasdaq: LABL) (mfr of pressure sensitive labels for CPG companies) sums up nicely what is happening for most CPG companies. In the fourth quarter, LABL saw 4% drop in sales ( ½ from volume ½ from pricing) offset somewhat with headcount reductions and spending cutbacks. Our view: 2010 doesn’t look great, but the worst may be behind us. Source: company reports

Kudos to Hanesbrands

Footnoted.org gave a gold star on Hanesbrands, Inc. (HBI), for supplying humanitarian aid to contract workers and relief agencies in Haiti. Hanesbrands, Inc. has donated $2.2 million worth of underwear (at wholesale value) to aid agencies for distribution to earthquake victims. It is also providing food, water, and relief supplies to its Haitian workers.

MENTAL GYMNASTICS

History and Geography buffs and those on International assignments will love this resource – it’s an excellent source of eclectic historical maps.

Say it Ain’t So

New technology proves that men understate how much “soft rock” they listen to (Manilow, Cher and Celine Dion) in the car radio. Read the full article here. Source: Book of Odds

Secret Passages

Ever wanted a secret passageway in your house? Here’s a company that designs and installs hidden passages for homeowners. Check out the chair slide passage way (Video Clip #1), so cool. http://hiddenpassageway.com/

Check Please!

How to spend $47,000 at lunch on your next trip to New York? We’re guessing that this expense report might get some scrutiny from the folks in the reimbursement department. View the receipt here. Source: Seriouseats.com

Scott's Top-5 Names of Fishing Flies

Those of you that know me are aware of my fly-fishing affliction. One thing I’ve noticed is that fly-tiers are deceptively good marketers. Rather than slap “new and improved” or “ultra” on their latest incarnation they dream up memorable, descriptive product names (that are eerily similar to names of professional wrestlers and names of exotic drinks I might add). Here’s a few of my favorites:

Mr. T
Mullet Slider
Eggi Wan Kenobi
Minister’s Dog
Mizzolian Spook

Source: Blue Ribbon Flies; Cabelas.com

Last Word

“Try not to confuse confidence with delusion.”

-- Seth Godin, Random Rules for Ideas Worth Spreading

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

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com

Wal-Mart's 401K Plan, TreeHouse Foods, Jarden, Chattem, Kissing Cousins and More!

2009-12-23T10:32:00.010-06:00

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.

MENTAL BREAK

Jack Bauer’s Last Minute Shopping Ideas

For fans of “24” and perhaps the paranoid, a nice collection of holiday items including a Spy Camera Pen, Faux Wrigley’s Chewing Gum Spy Camera, and an array of GPS and phone signal jammers. Source: Chinavision.com

Kissing Cousins

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

Animated Map of EBAY’s Black Friday Transactions

Here’s the link. Source: Chart Porn

Parting Thoughts:

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.

Scott Alaniz, CFA

scott@bostonmmm.com

Joe Chumbler, CFA

joe@bostonmmm.com