Snacks, Candy, Gum from Gue
06/20/2003 12:00 am EST
"Don’t forget that summer is a notoriously bad time to expect a major market rally to continue," notes Elliott Gue, editor of Wall Street Winners. "The months of June, July, August, and September are the worst for the major averages. In particular, August and September are notoriously bad. We haven’t seen investors this bullish since spring 2002. There’s no wall of worry for this market to climb." Despite his cautiousness, Gue does hold quality long-term positions in his portfolio. The three profiled here are all in the snack food and candy sectors.
"Nestle (NSRGY NASDAQ) is the biggest food company on earth, with an unprecedented global reach, charismatic leadership, and steady growth. We view Nestlé as a portfolio anchor especially during times that we feel you need to be defensive. The company is one of the few that accepts a slight miss on sales growth targets as long as margins continue to expand. In today’s economic environment, real profits and pricing power are the main engines of genuine growth. Recently, management outlined its new organic (margins and volumes) sales target of 5%-6%. Our analysis indicates that the target is achievable, given Nestlé’s solid restructuring and integration efforts, which are expected to save $4.5 billion in the next two years. The company is clearly focused on the long run, and should be trading at a premium to its competition before long.
"Wrigley’s (WWY NYSE) controls 21% of the global chewing gum market. Its major markets are the US, Europe, and Asia. The company has all the characteristics of a long-term winner—solid balance sheet (no debt and accelerating free cash flows), earnings visibility, and reliable growth. Admittedly, Wrigley’s is expensive but this is something that we try to isolate through our asset allocation method. The company has been benefiting from higher volumes, price increases, and cost controls. One more positive has been the decline of the dollar since 43% of sales come from Europe. Looking forward, management has a well thought out growth strategy. It’s been rolling out successful products, in the US market, while it’s also gaining market share in Western Europe. And it’s increasing its presence in Russia (5% of sales) and Asia (12% of sales). Although the last two regions represent a small portion of the company’s earnings, they’re the main growth contributors.
"Yum Brands (YUM NYSE) is a restructuring story but it also fits well with our positive stance toward inexpensive dining. Management has been turning operations around and we expect to see more good things. The company is attractive because of its low valuations and solid (although volatile) same-store sales. Furthermore, management’s long-term strategy of at least 10a% earnings per share growth should be achievable through international growth and better use of the company’s multi-branding status. YUM trades at a discount to its peers, something that will change once the company’s growth potential materializes."