Friday, November 02, 2007

Beer Shortages Looming

A potential beer shortage may be looming. Budweiser( BUD) Molson Coors (TAP) and SAB Miller (SBMRY.PK) as well as many smaller local craft beers may be affected. The worldwide Hops harvest is not in good shape. Certain hop growing regions have experienced drought and the yields are off. In the US hops had been in such over supply that last year the acreage planted with hops dropped by 30%. The US accounted for one quarter of hop production.

Larger brewers have been vexed by small craft and local brewers who have come up with better tasting and unique brews. The big guy's have even started to market pseudo small craft product to counter the trend. The small brewers do not have the financial clout to buy into big long term supply contracts. They have relied on an oversupply of hops to control their pricing. Now they may be forced to fiddle with the taste which is the primary reason for their success. The big brewers have been locking up long term supply contracts. The squeeze is on.

Also price competition may tone down as the supply realities eat up margins. We may be looking at price increases in the very near future. This could be the perfect storm for the big guys who have access to critical ingredients and may figure out that they do not need to beat their brains out in stupid price wars. The wine business as well as marketers of coolers may pick up some price sensitive volume.

The beer business is about to change. Just imagine; Global Warming and Climate Change issues are starting to influence how we drink beers. In a commodity squeeze the big guys have the financial clout. The little guys and the consumer do not have clout.

Thursday, November 01, 2007

Oshkosh Truck Is Different Now

Oshkosh (OSK) reported some excellent results for its fiscal year ended September 30, 2007. EPS increased 29.7 percent to $3.58 on sales of $6.3 billion and net income of $268.1 million. These results compare with EPS of $2.76 on sales of $3.4 billion and net income of $205.5 million in fiscal 2006. Oshkosh’s EPS exceeded the Company’s most recent earnings estimate range for fiscal 2007 of $3.35 - $3.40. Oshkosh also reaffirmed its estimate range for fiscal 2008 EPS of $4.15 - $4.35.

The results are primarily attributable to the new access equipment division. This truly outstanding performance by JLG during the quarter propelled Oshkosh to another all-time record according to Robert G. Bohn, chairman and chief executive officer.

Here is what is different. They have added $3.1 Billion of long term debt. Debt to equity used to be minuscule in this company. Long term debt to equity is now in excess of 200%. The gearing ratio is very high. Management needs to crank out a lot of profit margin just to feed the bank.

Usually when profits are up management starts to reward shareholders with a dividend increase. The dividend of ten cents has been declared and is unchanged for the quarter. The yield is a paltry 0.74%. Management is holding their breath waiting to see how the acquisition digests.

Also goodwill valuations are now valued at $2.5 billion which is almost 200% of the company's equity. Goodwill in the past was much less prominent on the balance sheet. Finally purchased intangibles went up by 500%. Purchased intangibles are now almost equal to the equity position yet in the past it was down around 20% of equity.

It's early days of course for the acquisition. But Oshkosh is a very different company. When you gear up this high what used to be ranked as minor problem may now have major impact.

Tuesday, October 30, 2007

Avon Cash Position Down

Avon (AVP) issues quarterly results announcing Q3 total revenue up 14%. Net income in the third quarter 2007 was $139 million compared with $86 million in the year-ago quarter. Earnings per share were $.32 versus $.19 per share in the prior-year quarter, representing a 68% increase. Hey that sounds really good.

Keep reading the press release. Just before the Q3 regional highlights comments the company starts to mention their cash and debt positions. Many an eye glazes over before you comprehend the meanings here. Most news services have already written their story on the basis of the headline and the first few paragraphs.

Cash is down. That's very bad by any method of analysis. Cash generation was only $63 million in this quarter compared to $439 million in the comparable quarter last year. Avon wants you to think things are better but they are not producing cash. The press release indicates they are spending more money on inventories and incentive based compensation. Yet they have been claiming inventory simplification gains. The comments are not congruent and beg some questions.

Management does go on to say that the next quarter cash generation will improve dramatically. At the same time debt levels are now $788 million higher than at year end. The share buy back program is sucking up a lot of the cash.

If this keeps up Avon may become one of the first examples for failed share buyback programs that overwhelmed operations with debt.

Monday, October 29, 2007

Merrill Lynch Boardroom Hypocrisy

Merrill Lynch (MER) has allowed the street to write Stan O'Neils obituary. Wall Street warrior destroyed by the sub prime slime. The official reasons are plentiful. Huge right offs because of sub prime. A bad conference call which shocked many investors into thinking he does not have a handle on it. Telephone calls to Wachovia which the board did not approve. Was this a bad guy or what?

Where was the board in all this? When you sit on the board of an I-Bank, especially one the size of Merrill Lynch you are supposed to be adding value in some manner. No one has said the board knew nothing about the sub prime investments or CDO's. How were they monitoring the company? What questions where they asking?

Lets quickly check in and see who some of these players were.

The Merrill Lynch Board consists of 11 members including Stan O'Neil according to the corporate web site. This is what Merrill Lynch is telling their own investors about these board members and why they are up to the job.

Aulana L. Peters Retired Partner in the law firm of Gibson, Dunn & Crutcher LLP; former Member, Public Oversight Board of AICPA; former Commissioner of the U.S. Securities and Exchange Commission; 63 years old; Director of Merrill Lynch since 1994. Excellent background and should have been a major contributor. Also has been on the board for thirteen years. Where was this guy as the strategies for sub prime were laid out and executed?

Charles O. Rossotti Senior Advisor to The Carlyle Group; former Commissioner of Internal Revenue at the Internal Revenue Service; former Chairman of the Board and Chief Executive Officer of American Management Systems; 64 years old; Director of Merrill Lynch since 2004. Excellent background in financial matters.

Alberto Cribiore Managing Partner and founder of Brera Capital Partners, a global private equity investment firm; former Co-President of Clayton, Dubilier & Rice, Inc.; 59 years old; Director of Merrill Lynch since 2003. Excellent background in financial matters.

John D. Finnegan Chairman of the Board, President and Chief Executive Officer of The Chubb Corporation; former Executive Vice President of General Motors Corporation, and Chairman and President of General Motors Acceptance Corporation, a subsidiary of General Motors Corporation; 56 years old; Director of Merrill Lynch since 2004. Hey he was supposed to be pretty good. GMAC has lots of experience in sub-prime.

There are three individuals who manage or are involved in large charities or educational organizations.

Carol T. Christ President, Smith College; former executive vice chancellor and provost, University of California, Berkeley. 63 years old; Director of Merrill Lynch since 2007.

Judith Mayhew Jonas Member of the U.K. government's Commission for Equality and Human Rights; former Provost of Kings College, Cambridge; former Special Adviser to the Chairman, Clifford Chance, Solicitors; former Vice Chair of the London Development Agency; 57 years old; Director of Merrill Lynch since 2006.

Judith Mayhew Jonas Member of the U.K. government's Commission for Equality and Human Rights; former Provost of Kings College, Cambridge; former Special Adviser to the Chairman, Clifford Chance, Solicitors; former Vice Chair of the London Development Agency; 57 years old; Director of Merrill Lynch since 2006.

I would say that of the stated experience none of these last three had any business being on the board of an I-Bank. Never the less they accepted the responsibilities and there is no evidence to indicate they were against all the sub-prime strategies.

The board is rounded out by a retired Admiral and two senior business executives from operating companies. They need to prove that they were not asleep at the switch.

With the exception of Aulana L. Peters all the board members are relatively new having been appointed since 2000. Did they have the necessary perspective on the business to be adequate to the job?

While Stan O'Neil is the standard bearer the board needs to accept major responsibility in this matter.