July 2012

What Investors are saying about Wal-Mart’s Competitors

While SuperValu (SVU- $1.80) is set to engage in a price war (which it will lose) with Wal-Mart, the more interesting activity is occurring at Amazon:

361 Capital writes… Amazon is going for every retailer’s jugular with local, same day delivery.

Amazon is seizing the opportunity to expand its network of U.S. warehouses – it had 34 at the end of last year – so it can place its merchandise nearer to big markets and offer same-day delivery to more consumers. That will erode one of the last advantages of the physical store: instant gratification. If someone needs a pack of nappies, a mobile phone charger, or bottle of cough medicine this evening, the only way to get them immediately is to go to a local store such as Wal-Mart, Best Buy, or Target, which all helped fund the anti-Amazon lobbying. But if Amazon can deliver to work or home in three or four hours – and at little or no shipping cost to the consumer – then why bother with the store? Source: Financial Times  

Amazon's About to Nino Brown Your Local Retailers.  Summary + the full Slate article here.

In March, we posted the Bear Case for Amazon.  Here’s the Bull Case for Amazon

And finally, Amazon and the economics of instant gratification - Read about how Amazon is playing to American’s need for speed.

Making the Case for Costco.  At 24x earnings, Costco is not cheap, and may be overvalued, but is there an argument that Costco is the company with the greatest ability to undercut its competitors on price?  Author lays out the case here.

1962.  The year that changed retailing. Full Story.

VENDORVILLE

Footnoted.com chop blocks Wal-Mart supplier Smithfield Foods over related-party transactions.  

OF INTEREST:

Soda vs Pop on Twitter

A Real-time Fashion Indicator - Company videos what people are wearing in Paris, Milan and Antwerp, uploads and analyzes the color pixels.  Pretty slick.

PERSONAL FINANCE TIPS

 IPO means “It’s probably overpriced.”

If your broker tries to get you in most IPO’s, he/she is not helping you.  We spent 15 long years working in the institutional investment business and saw firsthand how and why these deals are sold and priced.  You don’t get to pick the price you pay or when you buy it – the seller decides.  Various academic studies confirm that about 4 out of 5 IPO’s underperform.  Exhibit A: Facebook.

Annuities in 100 Words

Barron’s is out with their guide to the best annuities.  Consider the math on the best annuity in their table – an immediate annuity from Pacific Life.  If you are 60 years old, you give the insurance company $200k in exchange for $12k/yr for as long as you live.  When you die, they keep the money.  Die in 10 years and Pac Life keeps $80k ($200k - $120k in payments).  Stop.  Instead, keep your $200k, invest it in high quality treasury or municipal bonds and take home $8k yearly.  Did I mention that you get to keep your $200k?  Here’s the article.

Chipotle: A lesson in high P/E investing.  When the growth slows, look out below.

Parting Shot(Great stuff from Josh Brown):

Daddy, what do you do at your job?

 I answer emails.

 Huh?

Read the rest here.  Boy, I can relate.

Boston Mountain Money Management, Inc., is a boutique financial planning firm for executives or individuals with complex planning/investment needs. The founders have over 35 years experience working closely with executives of publicly-traded companies.

The authors and clients have a position in the shares of Wal-Mart Stores, Inc. at the time of this publication.

March 2012 Newsletter

Economics – The Long View

Don’t raise taxes, help create capital gains!  Interesting argument: The U.S. deficit is not because we are under-taxed, it’s because there has been a shortage of capital gains.  So, government should focus on policies that help create capital gains.

There’s always stuff to worry about – Bailing out Greece, China’s soft landing or the massive U.S. Deficit.  However, the U.S. consumer drives the world economy, and is as important to the world economy as all of Asia and Latin America.  Source: Paul Kedrosky. 

Consumer spending is affected by housing which is affected by the banking industry.  As soon as the banks can get back to the business of expanding credit (lending), the faster the economy will recover.  Here’s a concise explanation what’s happening with bank litigation and mortgage settlement.   

Stocks/Companies

Amazon:  Are the wheels coming off?  Here’s a detailed analysis with strong evidence questioning Amazon’s ability to grow profitably.   

Dr Pepper vs. Monster:  One sure way to guarantee mediocre (at best) investment performance is to overpay.  Not sure Dr. Pepper stock is undervalued, but shares of Monster look priced for perfection.  See the comparison here. 

Value investor believes there’s a little upside left in the shares of Sara Lee.  

Supervalu – cheap stock price, but shrinking sales and falling inventory turns suggest caution.  See the detailed financial analysis of its estimated worth here.

Finance/Investment Tips for High Income Earners

Buy Stuff vs. Do Stuff.  Think about how much your home is really costing you.  Industry estimates that a home’s annual maintenance cost is 1 -3% of its original cost.  Add another 1% for property taxes.  So, an $800,000 home may cost $32,000 in taxes and maintenance per year.  Downsizing to a smaller home, say $400,000, would put $16,000 in your pocket every year, enough to buy a nice month-long vacation in Aspen, the Hamptons, or the Coast of Spain. 

Why You Should Avoid Private Placements - Spot-on commentary from a former stockbroker. It’s worth a read for great lines like “the company will vanish like the cast of Mr. Belvedere”.  Apologies though for the foul language in the article (you can take the boy out of the brokerage, but not the broker out of the boy).   

Random Stuff You Might Like

“People will say he is socially awkward and incapable of leading.  They are wrong.  This kid is a winner.  Let’s do whatever we can to get him.  It will be the defining moment of the franchise.”

That’s a Bull’s-eye for Ernie Acorsi, on Super Bowl MVP Eli Manning – here’s the full 2003 College Scouting Report on Manning. 

Outliers – 10,000 hours of training.  Malcolm Gladwell doesn’t let scientific evidence stand in the way of book sales.    

Dilbert on Stockbrokers.  

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

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.

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.