The Prudent Investor

Decision Time
May 10, 2007, 8:12 am
Filed under: Consumer Goods, Update

In trying to decide which excellent company I was going to add to the Prudent Investor Portfolio, J. M. Smucker Company or Corn Products International, I decided to look at the annual report for each. Annual reports are an important view to the company. The first part, which I normally skip, is filled with smiling faces and flowery rhetoric extolling the virtues of the company. There is little value here, and the real meat is found toward the end, within the management’s discussion of the quarter’s results. The Smucker report appeared as expected, with explanation of the company’s products, and nice pictures to accompany the articles.

Not all annual reports are like this, however. I recently received my Berkshire Hathaway Annual Report, which is a publication where I love to read the opening section. Warren Buffett’s writing is unique within business, and any investor would be wise to at least read what he has to say.

I certainly was not properly prepared, however, to look at the Corn Products annual report. Instead of seeing what is expected at the beginning, I read an explanation as to the strategy the company formulated in 2004, their Pathway Strategy. This tells the investor how they are planning to get from where they are to where they want to be. Most important, however, is that they established measurable goals. When was the last time you heard of a company do that? They have published a means by which one can tell whether or not they are on track.

It is not uncommon for a company to establish measurable goals, but to announce them to the world is just something I have not seen. They have accomplished four of the five goals, and expect to reach the fifth by the end of next year.

This is the sort of thing that impresses me – to see management place themselves before the world and offer a way to judge them, and this is the reason why I have selected Corn Products International as the next entrant into the portfolio.

There is good news here, as well as bad, and I’ll look at the bad news first.

On April 24 CPO filed their quarterly report before the bell and it was a “knock your socks off” report. The stock almost immediately shot up more than 8% for the day. Had I come to the conclusion of adding the company to the portfolio just a little earlier, then I would have been able to start things with a nice profit. Not much that can be done here but to move forward.

The good news, however, is more important. The biggest concerns I have had about the company has been the price of corn. With a rising demand for ethanol, the cost of corn has accordingly risen and I would not expect to see it fall any time soon. According to Chairman and Chief Executive Sam Scott, the key to the strong report was not only strong North American business performance, but also the company’s ability to pass the increased cost of corn to customers in international markets. It appears to me that my biggest concern may not be much of an issue.

So later today I will make my initial purchase of Corn Products International.

Update: I purchased 12 shares at $40.59, and have updated the Portfolio link to the left.


Two Companies Are Eliminated
May 8, 2007, 7:18 am
Filed under: Consumer Goods, Update

I know that one should never fall in love with a company. I have made that mistake in the past and it has reduced my gains. Nonetheless, there are times when I will root for a company and of the four companies remaining in the list to be considered, the two companies I was rooting for will be removed.

One of the best books I’ve read about equity investing was written by James P. O’Shaughnessy and is titled What Works on Wall Street. You should be able to get a copy in your library, or use the link in the last sentence to get a copy through He looks at numerous factors that affect a stock’s price and although a combination of factors is best, the single most important number to examine is the Price to Sales ratio.

When I look at the four companies in contention, PEP, MKC, SJM, and CPO, I see P/S respectively as 2.96, 1.82, 1.4, and 1.0. The two above the 1.5 mark are PepsiCo and McCormick, so I have decided to remove them from consideration.

My daughter holds a small stake in PepsiCo, which I gave her when she graduated college. I purchased shares of the company long ago and the proceeds contributed towards helping with her college tuition. Pepsico has an excellent DRiP, and I would like to choose a company with a DRiP to be used as an example in this portfolio, but am seeking the best companies for the portfolio I can, and Pepsico does not fit the profile I am seeking.

A wild card in this is that according to Keith Mcarthur, McDonalds is beginning taste tests with Pepsi. This could simply be a way of putting the squeeze on Coke to lower their prices, but if McDonalds is actually considering switching then that would be huge. That knowledge is being left on the table, and I will keep watch over what happens with this.

The other company I would have loved to choose was McCormick. As one who lives near Baltimore, this company has regional relevance to me. Not only that, but I am friends with someone who works for the company as a taster – imagine that, getting paid to taste things.

In another portfolio any of these four companies would be very welcome, and any could successfully be chosen for this portfolio. However, I’ve got to make a decision somewhere along the line, to these two excellent companies are being dropped and next post I will decide between the J.M. Smucker Company and Corn Products International.

Yesterday I made my monthly purchase of three shares of SJW. You can follow the progress of this portfolio, including all of the purchases, by clicking on the Portfolio link to the left.

How Flowers Foods Inc. Makes Its Money, And Wrap-Up
May 3, 2007, 7:39 am
Filed under: Consumer Goods

The smallest company under consideration is Flowers Foods Inc.

Flowers Foods is involved in the production and marketing of bakery products in the United States. Major brands include Flowers, Nature’s Own, Whitewheat, ButterKrust, Sunbeam, and Roman Meal.

The company expects to see a 5% growth in sales this year, which is on the low end of what I would like to see, and about half the sales increase seen in the past two years. For this particular portfolio, this company is just too small. There is a real reduction of risk over time when a company offers a diversity of products and markets, and the narrow focus of each do not make it suitable for this portfolio, so I will remove it from consideration.

To recap the overview of the seven companies with which I started:

Removed from consideration:

  • Unilever NV (UN)
  • ConAgra Foods Inc. (CAG)
  • Flowers Foods Inc. (FLO)

Remaining in consideration:

  • Pepsico, Inc. (PEP)
  • McCormick & Co. Inc. (MKC)
  • The J. M. Smucker Company (SJM)
  • Corn Products International Inc. (CPO)

As I write this I have no idea how I am going to compare the giant Pepsico with the other three small companies. However, next post I will momentarily pause to not only find a reasonable answer, but also to return to SJW, the water company in the portfolio. A few weeks ago I received the company’s annual report, so I will report the information found within. I have long been a proponent of owning no more companies that I can keep track of, which means that I need to be able to at least look over the annual report and quarterly reports. I also like to read news articles about the companies I own and will report anything of significance in this regard as it concerns companies within the Prudent Investor Portfolio.

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.