Thursday, June 25, 2009
Tuesday, June 2, 2009
The Pasta Pitfall Predicament
January 15, 2009
American Italian Pasta Company
The past year has been gloomy for most investors. But the brave souls who bet on American Italian Pasta Company (AIPC) would disagree.
As you may have deduced, the company produces pasta — 300 different varieties of it. Its stock price jumped by over 350% in the last 9 months, while the S&P 500 plummeted 40%. Historically, such stunning results have been confined to companies that became overnight monopolies by virtue of research. In most cases, however, those companies did not produce pasta.
View the full AIPC chart at WikinvestIt makes one wonder whether AIPC has invented some sort of revolutionary hi-tech pasta. While an awesome concept, more likely is that investors have been gravitating towards consumer staples for fear of recession. Pasta is about the cheapest filler food Americans know – almost like the end of the line in terms of saving costs – and, should the economy continue to degenerate, more and more people would find it appetizing.
While I cannot claim to be an oracle for American dietary fad, I find the story of the superstar pasta company to be baffling. With a market capitalization of $471 million and earnings of $19 million in 2008 the price to earnings ratio for the company stands at a stellar 24. To put that into perspective, both Google (GOOG 428.40 ↑0.43%) and Kraft Foods have P/Es of 19. Traditionally, higher P/Es have been the prerogative of companies expected to grow rapidly. Thus the ratio, in this case, would indicate investors are expecting AIPC’s growth to outpace both Google’s and Kraft’s.
And amazingly, odds are they’re correct… but only in the short term. If the recession positively affects America’s love of pasta, AIPC is well placed to be a beneficiary. The real question is whether the benefit is worth a 350% premium over last year’s price? After churning in loses of $100 million in 2005 and another $30 million in 2006, the company became profitable in 2007. Revenue growth between Sept. 2006 and Sept. 2008 was nearly 30%. What this suggests is that the company needs to maintain production above a certain level to cover its fixed costs. Once that has been achieved, its high gross profit margins allow it to pocket most revenues.
Readers will notice that AIPC’s growth has correlated with the tanking of the US housing market. However, no recession lasts indefinitely, and thus we can hardly expect AIPC to continue doubling its net income every year. In order to maintain its stellar revenue and earnings growth, the company needs to add production capacity. That does not happen overnight. Additionally, the possibility of increased US prosperity (and decreased pasta consumption) means that the management has to be careful about this option. Even if AIPC doubles its net income to $40 million in 2009, the company would find it difficult to maintain that level of profitability in the long-run. This is because the company does not operate as a monopoly — there are other pasta producers in US, including Kraft Foods (KFT 27.00 ↑1.35%), the Goliath of the food industry. Basic economics suggest that, due to competition, high margins do not last forever. Basic economics also suggest that Wal-mart (WMT 49.93 ↓1.30%) will wrangle out every bit of margin out of its suppliers. Unfortunately for AIPC, Wal-mart accounts for 23% of their sales.
To their credit, the company does have a decent operating cash flow. But a 13x price to operating cash flow is hardly impressive, especially for a company that pays no dividends and makes minimal stock buybacks. Investors could do better by holding on to corporate bonds.
AIPC tells a great story. But it is yet another stock that made its investors forget that a share is not a claim on just next year’s earnings, but on earnings forever. Unfortunately, in this story, the forever is not so thrilling.
New York Stock Exchange,
American Italian Pasta Company
The past year has been gloomy for most investors. But the brave souls who bet on American Italian Pasta Company (AIPC) would disagree.
As you may have deduced, the company produces pasta — 300 different varieties of it. Its stock price jumped by over 350% in the last 9 months, while the S&P 500 plummeted 40%. Historically, such stunning results have been confined to companies that became overnight monopolies by virtue of research. In most cases, however, those companies did not produce pasta.
View the full AIPC chart at WikinvestIt makes one wonder whether AIPC has invented some sort of revolutionary hi-tech pasta. While an awesome concept, more likely is that investors have been gravitating towards consumer staples for fear of recession. Pasta is about the cheapest filler food Americans know – almost like the end of the line in terms of saving costs – and, should the economy continue to degenerate, more and more people would find it appetizing.
While I cannot claim to be an oracle for American dietary fad, I find the story of the superstar pasta company to be baffling. With a market capitalization of $471 million and earnings of $19 million in 2008 the price to earnings ratio for the company stands at a stellar 24. To put that into perspective, both Google (GOOG 428.40 ↑0.43%) and Kraft Foods have P/Es of 19. Traditionally, higher P/Es have been the prerogative of companies expected to grow rapidly. Thus the ratio, in this case, would indicate investors are expecting AIPC’s growth to outpace both Google’s and Kraft’s.
And amazingly, odds are they’re correct… but only in the short term. If the recession positively affects America’s love of pasta, AIPC is well placed to be a beneficiary. The real question is whether the benefit is worth a 350% premium over last year’s price? After churning in loses of $100 million in 2005 and another $30 million in 2006, the company became profitable in 2007. Revenue growth between Sept. 2006 and Sept. 2008 was nearly 30%. What this suggests is that the company needs to maintain production above a certain level to cover its fixed costs. Once that has been achieved, its high gross profit margins allow it to pocket most revenues.
Readers will notice that AIPC’s growth has correlated with the tanking of the US housing market. However, no recession lasts indefinitely, and thus we can hardly expect AIPC to continue doubling its net income every year. In order to maintain its stellar revenue and earnings growth, the company needs to add production capacity. That does not happen overnight. Additionally, the possibility of increased US prosperity (and decreased pasta consumption) means that the management has to be careful about this option. Even if AIPC doubles its net income to $40 million in 2009, the company would find it difficult to maintain that level of profitability in the long-run. This is because the company does not operate as a monopoly — there are other pasta producers in US, including Kraft Foods (KFT 27.00 ↑1.35%), the Goliath of the food industry. Basic economics suggest that, due to competition, high margins do not last forever. Basic economics also suggest that Wal-mart (WMT 49.93 ↓1.30%) will wrangle out every bit of margin out of its suppliers. Unfortunately for AIPC, Wal-mart accounts for 23% of their sales.
To their credit, the company does have a decent operating cash flow. But a 13x price to operating cash flow is hardly impressive, especially for a company that pays no dividends and makes minimal stock buybacks. Investors could do better by holding on to corporate bonds.
AIPC tells a great story. But it is yet another stock that made its investors forget that a share is not a claim on just next year’s earnings, but on earnings forever. Unfortunately, in this story, the forever is not so thrilling.
New York Stock Exchange,
What Does Dr. Copper Think About the US Economy?
May 14, 2009
Today’s Daily Angle comes from Wikinvest Wire member Tim Iacono of TheMessThatGreenspanMade.Blogspot.com. Read the full article here
As of Wednesday, copper prices have fallen for five days straight, the longest losing streak since the tumultuous period in mid-December when it appeared the whole world was about to come to an end and surging demand for Treasuries pushed the ten-year yield to what can only be described as the “freakishly low” level of 2.0 percent.
Hey, look. Yields are falling again…
Often moving in the opposite direction of the trade-weighted dollar as part of the general “inflation trade”, or, after the plunging prices seen over the last year, what would be better described as the “re-flation trade”, the metal usually doesn’t do very well when the dollar is strengthening against other currencies.
Hey, look. The dollar is surging today…
The world’s most widely used metal, called Dr. Copper because it has a PhD in economics and possesses an uncanny ability to predict future expansions and contractions, now appears to be questioning its recent assessment of the economy after feeling quite optimistic for months.
That much is clear in the chart at right.
Actually, from the looks of the chart, Dr. Copper seems to have first spotted a rebound back in December but wasn’t sure until mid-February, still about three weeks in advance of the same rebound being detected by equity markets in early-March.
Of course, much of the good doctor’s recent outlook had to do with what’s been going on in China where the government has been stockpiling the metal to be used for infrastructure projects later in the year.
Unlike the U.S., most of China’s stimulus money is being spent on building stuff.
Some say that China’s central bank has been involved in the copper purchases somehow and that it has fistfuls of dollars it desperately wants to exchange for something other than dollars. To be sure, that is an understandable position to take. It’s nice to own more gold, a point that was made clear with the recent announcement of the doubling of their gold reserves, but you can build a lot more stuff with copper than with gold.
All of this may be confusing Dr. Copper a bit.
Up until a few weeks ago, it seemed clear that the global economy was on the mend, but there is much more uncertainty now.
The doctor will surely provide an update when one is ready.
Today’s Daily Angle comes from Wikinvest Wire member Tim Iacono of TheMessThatGreenspanMade.Blogspot.com. Read the full article here
As of Wednesday, copper prices have fallen for five days straight, the longest losing streak since the tumultuous period in mid-December when it appeared the whole world was about to come to an end and surging demand for Treasuries pushed the ten-year yield to what can only be described as the “freakishly low” level of 2.0 percent.
Hey, look. Yields are falling again…
Often moving in the opposite direction of the trade-weighted dollar as part of the general “inflation trade”, or, after the plunging prices seen over the last year, what would be better described as the “re-flation trade”, the metal usually doesn’t do very well when the dollar is strengthening against other currencies.
Hey, look. The dollar is surging today…
The world’s most widely used metal, called Dr. Copper because it has a PhD in economics and possesses an uncanny ability to predict future expansions and contractions, now appears to be questioning its recent assessment of the economy after feeling quite optimistic for months.
That much is clear in the chart at right.
Actually, from the looks of the chart, Dr. Copper seems to have first spotted a rebound back in December but wasn’t sure until mid-February, still about three weeks in advance of the same rebound being detected by equity markets in early-March.
Of course, much of the good doctor’s recent outlook had to do with what’s been going on in China where the government has been stockpiling the metal to be used for infrastructure projects later in the year.
Unlike the U.S., most of China’s stimulus money is being spent on building stuff.
Some say that China’s central bank has been involved in the copper purchases somehow and that it has fistfuls of dollars it desperately wants to exchange for something other than dollars. To be sure, that is an understandable position to take. It’s nice to own more gold, a point that was made clear with the recent announcement of the doubling of their gold reserves, but you can build a lot more stuff with copper than with gold.
All of this may be confusing Dr. Copper a bit.
Up until a few weeks ago, it seemed clear that the global economy was on the mend, but there is much more uncertainty now.
The doctor will surely provide an update when one is ready.
Will the US be Next to Receive Credit Warning?
Today’s Daily Angle comes from Wikinvest Wire member Kathy Lien of KathlyLien.com and FX360.com. Read the full article on Kathy’s blog.
The biggest story in the currency market last week is news that Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This means that the U.K. now has a 1 in 3 chance of losing its prized AAA rating. I have written an extensive article on what this could mean for the British Pound and if the threat is serious on FX360.com.
Instead, I think it is more interesting to talk about whether the U.S. could be the next country to receive a credit warning. According to the comments by the S&P, their fear is that debt in the U.K. could hit 100 percent of GDP in the near term. Yet the U.K. is not the only country to be up to their ears in debt. The IMF released a report in April that projects U.K. debt load to be at 66.9 percent of GDP compared to 70.4 percent for the U.S. and 69 percent for the Eurozone. The following chart shows the IMF’s estimated government debt as a percentage of GDP and it is clear that the U.K. is not running the highest debt load (click on image to enlarge).
Source: Wall Street JournalS&P is starting to examine more G10 nations and there is a decent chance that the U.S., Germany, France, Italy, and Japan could come under review as well. There are major consequences to downgrading U.S. debt or even just putting on credit watch. I think that a physical downgrade of U.S. or U.K. is unlikely. The U.S. dollar is the global reserve currency and S&P may not have the guts to say that the “Emperor has no clothes.” This is one area where being reactive rather than proactive can actually benefit S&P.
Last week, in my article “Could America Really Lose Its Triple A Rating?,” I said:
“I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.
With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations. ”
» Read more...
The biggest story in the currency market last week is news that Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This means that the U.K. now has a 1 in 3 chance of losing its prized AAA rating. I have written an extensive article on what this could mean for the British Pound and if the threat is serious on FX360.com.
Instead, I think it is more interesting to talk about whether the U.S. could be the next country to receive a credit warning. According to the comments by the S&P, their fear is that debt in the U.K. could hit 100 percent of GDP in the near term. Yet the U.K. is not the only country to be up to their ears in debt. The IMF released a report in April that projects U.K. debt load to be at 66.9 percent of GDP compared to 70.4 percent for the U.S. and 69 percent for the Eurozone. The following chart shows the IMF’s estimated government debt as a percentage of GDP and it is clear that the U.K. is not running the highest debt load (click on image to enlarge).
Source: Wall Street JournalS&P is starting to examine more G10 nations and there is a decent chance that the U.S., Germany, France, Italy, and Japan could come under review as well. There are major consequences to downgrading U.S. debt or even just putting on credit watch. I think that a physical downgrade of U.S. or U.K. is unlikely. The U.S. dollar is the global reserve currency and S&P may not have the guts to say that the “Emperor has no clothes.” This is one area where being reactive rather than proactive can actually benefit S&P.
Last week, in my article “Could America Really Lose Its Triple A Rating?,” I said:
“I think that ratings agencies talk a good game but they will problems following through. The consequences of downgrading U.S. sovereign debt is huge both politically and economically. Therefore Moody’s or any rating agency for that matter may be reluctant to the first to pull the trigger. Downgrading the U.S. is very different from downgrading Ireland. Based upon how the rating agencies have handled the credit derivatives bubble, chances are they will be behind the curve once again.
With that in mind, U.S. finances are deteriorating significantly, raising the concern of Asian nations. However if President Obama is successful at turning around the U.S. economy, America will be well equipped to meet its debt obligations. ”
» Read more...
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