Shifting Assets to Increase Margins
04/14/2014 12:01 am EST
This company's decision to sell off one of its brands is happening in many other industries, says MoneyShow's Jim Jubak, but he sees potential problems for this strategy.
Procter & Gamble (PG) has just sold its pet food business to Mars for a good hunk of money, but I think you need to look on this as kind of an iconic deal. This says a lot about where we are in 2014. The reason they sold it is because they do decent sales, but profits are really, really slim and Procter & Gamble is saying, hey, we don't see any way really to grow this business and increase margins, so what we're going to do is we're going to take the cash that we get from selling this business to Mars, and Mars will do better because it will put it together with its existing pet food business and get more economies to scale and might even be able to get margins up, at least that's Mars' theory, and Mars being a privately held company doesn't have to worry about what Wall Street says, so Mars will do that and Procter & Gamble will take that money and invest it in faster growing opportunities.
Now, you can see this happening all across the economy, all across the global economy. Nestle is doing it, DuPont (DD) is doing it. Large companies are looking at all of their bits and pieces and going, okay, this bit and piece has a pretty good rate of return on investment. In fact, gives us a good growth path going forward, and to fund that we'll sell off this piece to somebody else. Now, there are two problems here that you can see. One is, is the selling company right about their ability to reinvest that cash in a part of their business that's growing faster. I think for somebody like DuPont where they've got the seed business to invest in, I think that's very true; for Nestle which has got a dairy business that's growing pretty fast, I think that's true; for Procter & Gamble, much more of a challenge because they've really got this problem pretty much all across the company, so can you reinvest your money at a higher margin.?
Second is, can the buying company, the company that just got that pet food division, that bought this line of goods from Nestle, can they actually put it together in a way that gets their margins up, so you've got two big challenges going forward, but the important thing to notice about this is that both of these challenges are really set up by the fact that this is a relatively slow growing economy and growth is something that people are struggling to find, CEOs are struggling to find, and you as an investor are probably thinking the same thing. That's why IPOs look so attractive because they don't have to worry about growth. Going forward, growth is going to be the scarce thing in this market. If you can find companies with good growth paths, they're the place you ought to be putting money in 2014.