The Prudent Investor

How Corn Products International Makes Their Money
April 26, 2007, 7:01 am
Filed under: Consumer Goods

With a $2.3 billion market cap, Corn Products International Inc., the penultimate company in consideration, will now be examined.

Corn Products International is one of the world’s largest corn refiners, as well as a major supplier of food ingredients and industrial products derived from the wet milling of corn and other starch-based materials. The company is the largest producer of dextrose, and a leading regional producer of starch, high fructose corn syrup, and glucose.

Products are divided into sweeteners (53% of net sales), starch products (23%), and co-products (24%). Sweeteners include high fructose corn syrup (HFCS), used in soft drinks and other beverages and foods; and dextrose, used in the food industry. Starch products include mainly corn starch used as a component in the production of paper, corrugated containers, construction materials and textiles. Co-products include corn oil used as cooking oil and in the production of margarine and other foods, corn gluten feed sold as animal feed, and corn gluten meal sold as a feed protein, primarily to the poultry industry.

Standard & Poor expects to see sales grow this year in the 11% range, which is very significant. This would match the previous year’s sales growth. They also expect to see an earnings increase of 20% this year. Numbers of this sort are only seen by small companies, with the attendant risk of the small company. That said, Corn Products International will remain in consideration for addition to the portfolio.


How J. M. Smucker Co. Makes Its Money
April 24, 2007, 7:00 am
Filed under: Consumer Goods

The final three companies on the list actually are small. With less than a $3 billion Market capitalization, the J. M. Smucker Company is the next company to be examined.

J. M. Smucker Co. produces fruit spread products, foods, beverages, ice cream toppings, and natural peanut butter. In 2002 it acquired Jif and Crisco. It reports as two segments, U.S. retail and special markets.

The U.S. retail market segment includes the consumer foods and oils and represents 69% of sales and 82% of operating profits. The special market segment, which includes foodservice, international, industrial and beverage businesses, represents 31% of sales, 18% of operating profit.

Principal product categories are peanut butter (19% of sales), shortening and oils (16%), fruit spreads (14%), flour and baking ingredients (14%), baking mixes and frostings (11%), and other categories that each contribute less than 5% to sales.

Although Standard & Poor sees the current net sales growth to only be in the 2-3% range, they expect that earnings will rise 4.5% for the year, and 7-8% longer term, and this works for me. This growth will probably come from thaw-and-serve sandwiches, as well as price increases.

The company appears to be favorable enough to retain for further consideration.

How McCormick & Co. Makes Their Money
April 19, 2007, 7:02 am
Filed under: Consumer Goods

I will now begin looking at the small companies in line for consideration. At about $5 billion Market capitalization, McCormick & Company is not really small, but seems to be when compared to the previous three companies.

McCormick & Co. is the world’s largest spice company, with operations in the manufacture, marketing and distribution of spices, seasonings, flavorings and other specialty food products.

The company is divided into two segments, consumer products and industrial products. The consumer segment accounts for 57% of sales and 79% of operating profits, and sells spices, herbs, extracts, seasoning blends, sauces, marinades and specialty foods to the consumer food market. The industrial segment contributes 43% to sales and 21% to operating profits, selling seasoning blends, natural spices and herbs, wet flavors, coating systems and compound flavors to food manufacturers and the food service industry.

This company, like Unilever, is under transition, but unlike Unilever, is expected to complete restructuring next year. Among other things, the plan is to consolidate global manufacturing, improve its go-to-market strategy, and eliminate administrative redundancies. Last year it realized $10 million in savings and expects to triple that this year, so it appears that the direction is working.

Of note last year was its purchase of the assets of Epicurean International (Simply Asia Foods), which will allow it to more effectively market the Asian population. An effort to revitalize their brand spices and seasonings to include new products and packaging improve the bottom line, as it affects a third of their consumer sales.

Increased earnings and profit margins give me hope that this company will have a bright future, and will remain in consideration for addition to the portfolio.

How ConAgra Makes Its Money
April 17, 2007, 7:04 am
Filed under: Consumer Goods

The third largest company in consideration is ConAgra Foods.

The company is divided into four segments: consumer foods, which provids 57% of total sales, foods and ingredients (28%), trading and merchandising (10%), and international foods (5%).

The consumer foods segment consists of numerous popular major brands, such as Hunt’s, Healthy Choice, Chef Boyardee, Wesson, Orville Redenbacher, Slim Jim, Peter Pan, Gulden’s, Swiss Miss, and La Choy. Major frozen grocery brands include Healthy Choice, Banquet, Marie Callender’s, Kid Cuisine, Morton, Chun King, La Choy and Wolfgang Puck. Refrigerated products include Armour, Butterball, Brown ‘N Serve, Healthy Choice, Hebrew National, Parkay, Blue Bonnet, Fleischmann’s, and Reddi-wip.

The foods and ingredients segment includes meals, entrees, prepared potatoes, a variety of custom manufacturedproducts for sale to foodservice establishments, and branded and commodity food ingredients.

CAG’s trading and merchandising segment includes the sourcing, marketing and distribution of agriculturaland energy commodities. International foods includes branded food products.

This appears to be a company in transition, which means that a number of things are happening that are changing the face of the company. In the past several years they have adopted an acquisition and divestiture strategy in an attempt to move its focus toward its core branded food products, and away from its commodity-related businesses. Time will tell whether or not this direction will find itself beneficial at the bottom line. They have also implemented operational improvement initiatives to generate better sales growth, profit margins, and capital. While it is laudable to work on changing the direction of the company, it also makes an evaluation extremely difficult.

And speaking of difficulty, in February they estimated that they would be looking at a $50-60 Million charge for the recall of it Peter Pan peanut butter, which translates to 6-8 cent per share.

Another concern is that their largest customer, Wal-Mart, accounts for about 12% of their total sales. Wal-Mart is in the process of finding ways to grow their stagnated business, and putting pressure on suppliers is one way of doing this. CAG’s bottom line could be eroded if this happens.

ConAgra Foods is a company to which I would like to return at some point well into the future, but its future at this point is just too uncertain to me, so I will be removing it from consideration.

How Unilever Makes Their Money
April 12, 2007, 7:30 am
Filed under: Consumer Goods

Next on the list, Market cap-wise, is Unilever. This is the first company I have examined for the Prudent Investor Portfolio that is not based in the United States.

Unilever was founded in 1930 following the merger of a company in the Netherlands and the U.K. To avoid punitive taxation levies, they pooled their interests through a business merger as opposed to a legal merger. Two controlling companies were established, Unilever PLC and Unilever NV. To be allowed to operate as a single legal entity, a series of agreements was put in place and the result is the Unilever company we know today. The current regional sales composition shows Europe 37%, The Americas 35%, and Asia Africa 27%.

The company is organized into two global divisions: foods and home and personal care, each one very roughly equal in size. The Foods division’s major brands are Knorr, Hellmann’s, Wishbone, Country Crock, SlimFast, Lipton, Breyers, Ben & Jerry’s, Klondike, and Popsicle. The Home and Personal Care division’s major brands include Snuggle, Surf, Dove, Pond’s, Suave, Lifebuoy, and Vaseline.

For this year Standard & Poor only sees a rise in revenues of 3%, which is not nearly the rate I would like to see going forward. Sales growth in Europe is especially sluggish. Their growing percentage of sales in developing & emerging markets does not offset the company’s below industry growth in developed markets. The stock price moved very strongly during the second half of last year, and could act as a weight looking forward.

This is not a positive overview of the company, and unless I encounter information to counteract what I have read, I will be removing the company from consideration.

How PepsiCo Makes Their Money
April 10, 2007, 7:18 am
Filed under: Consumer Goods

Before we really get into comparisons, I need to take a look at how each company makes their money. An understanding of this crucial element will allow for a proper comparison, and may lead me to remove a company from consideration.

The first company I will look at will be, by far, the largest, PepsiCo. At first blush one would think that the primary comparison against PepsiCo would be Coca-Cola, but according to Yahoo, Coca-Cola is in the Beverages – Soft Drinks industry, and PepsiCo is in the Processed & Packaged Goods industry. This placement requires that we understand how PepsiCo makes their money.

In addition to carbonated and non-carbonated beverages, PepsiCo manufactures a variety of salty, convenient, sweet and grain-based snacks, and Frito-Lay North America is one of their four business segments. Approximately one third of their net revenue comes from this division, which consists of Fritos corn chips, Lay’s potato chips, Cheetos, Rold Gold pretzels, Sunchips, and a host of other snack foods.

PepsiCo Beverages North America is the segment with which we are most familiar, and contributes 28% to the revenues. The beverages manufactured within this arm of the organization are Pepsi, Mountain Dew, Sierra Mist, Mug, Gatorade, Tropicana Juice Drinks, and a number of other carbonated and non-carbonated beverages.

PepsiCo International, as measured by revenues, is the largest section of the company, offering 35% to the total, operating in over 200 countries, with the largest being Mexico and the United Kingdom. The products within this section include Sabritas, Gamesa and Alegro in Mexico, Walkers in the United Kingdom, and Smith’s in Australia. Beverage concentrates and fountain syrups (Pepsi, Mountain Dew, Gatorade, and Tropicana as examples) are sold to franchise bottlers outside of North America, although in some markets the company owns their own bottling plants and distribution facilities.

Finally, Quaker Foods North America adds 5% to the revenues, through products like Cap’n Crunch, Life, Quaker hot cereals, Rice-A-Roni, Aunt Jemima mixes and syrups and Quaker grits.

The outlook is considered to be quite favorable for PepsiCo. Standard & Poor expects to see net sales the four segments respectively growing 6%, 8%, 14%, and about 5%, averaging to 7-8% for 2007. Their earnings per share estimate of 11% for this year and the future would certainly fit my definition of a positive outlook. The fact that the company’s products are spread out in many areas, and their market includes not just North America, but the world, allows for a diversification not available to most other companies.

April Update
April 9, 2007, 10:28 am
Filed under: Update

This morning I made the April purchase for the portfolio:

3 shares of SJW Corp. at $38.94    per share

The details of purchases for the portfolio can be found at The Prudent Investor Portfolio link on the left.