Thursday, August 28, 2008

Pepsi Goes Ruskie

PepsiCo (PEP) and Pepsi Bottling Group (PBG) just announced the completion of a 75.53% stake in Russia's leading branded juice company JSC Lebedyansky (RTS: LEKZ), excluding the company's baby food and mineral water business, for US$ 1.4 billion. The original deal had been announced on March 20, 2008. Additional terms of the agreement were not disclosed.

With only four months left in Calendar 2008 PepsiCo and PBG indicated the transaction will not materially affect their previously provided guidance for 2008. Well what about 2009 it’s not that far away? The Russian market is growing double digits in certain categories.

On the other hand the Russian market has proven treacherous for oil companies. It seems that the Russian power elite let them fix up the oil industry and is then confiscating it. Just look at BP. So the political risk is that if Pepsi is successful in substantially enhancing the value of their Russian enterprise who is to say someone in the Russian power elite will not reach out and carve off a few juicy pieces for themselves.

PepsiCo operates as a consumer products company with an implicit risk premium driven by the desire to quench thirst with sugared water. Now you have to factor in political risk. If we worry about the cold war being rekindled with Russian operations in Georgia, you cannot accept Pepsi’s foray into Russia as just another day in the office.

Wednesday, August 27, 2008

Icahn Report Discusses Use of Shareholders Funds

The Aug 27 post by Carl Icahn on The Icahn Report had an interesting comment about corporate use of funds against shareholder interests. Essentially all those high powered professionals and service providers are paid for by the shareholder. If you are on the outside trying to change the inside you are spending your own money.
Corporate democracy needs to establish its own funding. Boards of Directors need to have their own budgets and not be beholden to management. Management should not be allowed to spend certain monies in a reflexive defensive moves which are not necessarily in the best interests of shareholders.

The funding will move closer to the model where Congress has resources that are independent of the Executive Branch.

With respect to shareholder lists; the transfer agent should allow mailings and or other communications for nominal admin fees and appropriate processing costs. The list cannot become public as every scam agent and junk mail marketer will deluge your mail box. The transfer agent will become the gatekeeper and ensure financial information is available to the shareholder.

The environment needs to be gamed in favour of the investor.

Dollar Tree – Is It an FX Play?

Dollar Tree Inc. (DLTR) reported some excellent results. Their press release headlines a 27.3% increase in EPS. Sounds good. No really it’s great, most companies would kill to be able to say something like that. President and CEO Bob Sasser said “Our performance in the second quarter demonstrates the growing relevance of Dollar Tree to the consumer during tough economic times,”

The comment begs the question: How relevant will you be when everyone gets their financial mojo back? Despite that S&P maintains their buy rating on Dollar Tree. Wonder if the rating is an inverse economic forecast of the overall US economy?

No mention of the complexity of managing a huge number of stock keeping units. The company does feel it has reduced shrinkage which of course is positive for margins.
At the price points Dollar Store operates at most of the stock keeping units are manufactured off shore and subject of the influences of Foreign Exchange rates. This company is becoming a back door foreign exchange play. How have they hedged that problem?

Do investors understand that aspect of the risk premium for this stock? Management is not pointing out this issue.

Tuesday, August 26, 2008

Maple Leaf Foods-Tainted Future

Maple Leaf Foods (TSE:MFI and MLFNF.PK) is facing a food processors worst nightmare. Their product has killed many people. Hard to argue with a death certificate. Investors are beating the price down as the untold costs of lawsuits climbs upwards off the charts.

The company is sanitizing their Toronto facility and it may be back in production within a day or so. We will see about that. They also have many other facilities so perhaps there is redundancy. The damage to the brand is incalculable. But it is a certainty that the damage is great. Consumers are expected to resist buying the Maple Leaf brand. The safety argument should not end up in a funeral home.

Some commentary concludes that it is very hard to manage against this sort of risk. But if you look back at Maple Leaf’s history almost two years ago they had another problem in another facility where they found syringes in the plant which necessitated another product recall. (See this blog on Nov 7 & 9, 2006)

While the current buzz is about product safety, investors should start looking at the governance process that allows this to occur. The board of directors surprisingly all have no experience in the food industry with the exception of the McCains from New Brunswick. So how could the rest of the directors be savvy as to the operating problems in this industry? What questions have they been asking? What assurances have they been relying on?

Can a company come back from this sort of problem? What costs have not been identified? The dividend cannot be looking good. The stock is trading near its 52 week low. Should this board of directors be leading the company? What changes will this board bring about to ensure problems of this magnitude do not re-occur. In any event the risk premium in this stock is very much higher than anyone truly comprehended.

Monday, August 25, 2008

Wal-Mart - Can Marketing Influence Share Price

Wal-Mart (WMT) has experienced approximately a 34% increase in share appreciation in the past year. At one point it was a very good whipping boy. Problems in Germany, South Korea and Japan. Sluggish sales in North America. I am positive I had a few skeptical comments of my own.
Fortune Magazine had an interesting Marketing article by Suzanne Kapner in the Aug 18 edition. Writing from a marketing perspective the premise is that Wal-Mart has had marketing challenges and originally saw itself as a logistics company who could deliver low prices through excellent materials handling. They have attempted a cultural change according to the article to become more of a marketing company, which has had some success.
The article concludes that since the campaign started about one year ago the stock has gone up approximately 34%. “Consumers save money¬¬-and Wal-Mart lives better” being the final quote. So it should be about the marketing?

Earnings are only up 17% when comparing the comparable quarters. Problems in Japan persist. Incursions into India remain confusing. The North American economy continues to have serious problems. So why is the stock up 34%.

If you get into the emotional aspects of money and financial behaviour perhaps the marketing comments are correct. If you advertise well enough than the investor will buy in and bid up the stock. Wal-Mart has a positive spin to the marketing. “Save Money Live Better”. Automotive companies who advertise price discounts come across as greedy and desperate. No 34% increases over there.

The critical thinking investor worries that this is US based marketing which has not influenced other regions with serious problems. Also if a share price reflects the future earnings of a company, a domestic marketing campaign serving up 17% growth should not be rewarded with a 34% value increase.

Beware of the marketing? They want you to buy stuff.