Thursday, May 1, 2008

Wrigley is a fat pitch-swing hard

It has been one month since I last wrote in this blog. I’ve a bad cold, the flu, and travelled back to Nebraska for the Summer. I also was constantly reassessing my view of the stock. Was it correct or was I just another pompous idiot that would lose a lot of money.

I’ve convinced myself that my negative view of the economy and the market is correct and not the product of my flu delusions. The deleveraging of thefinance system and the reduced spending capacity of the consumer will not disappear with a few hundred dollars in rebates. We are not set for a Vee shaped turnaround in the economy or market. My view is correct and I’ll continue to march that way. Keep in mind that I’ve never gone 100% to cash and the darkside. I’ve held a long-term portfolio of companies like Wrigley that have performed well during this bear market rally and I continue to do nicely in either direction.

Speaking of Wrigley, the market is giving us a wonderful present. I happen to hold a pile of cash. Goldman Sachs is giving me 3ish percent and I’ve been happy. Wrigley will give me 6.5%-13% over the next 12 months and it will return to cashwithin a year at a time that is more likely to offer stock market values. I feel I’m increasing my return without deviating from my strategy of being able to capitalize on low stock prices.

Mars is buying Wrigley for $80 cash. They’ve said it will close in 6-12 months. The biggest risk is the EU. They like to mix it up on all big mergers. I believe the companies will get all regulators to approve and it is a slam dunk approval from the shareholders. Financing is in place from the world’s three biggest, and best, financial firms: Berkshire Hathaway, JP Morgan, and Goldman Sachs. The financing is set. It isn’t a “term sheet.” Mars is confident in its due diligence as the breakup fee is 1 Billion! All the participants are quality operations; not the suspect deal-doer types. Mars will soon own Wrigley and WWY shareholders will have $80. cash.

You can buy WWY for $76. When the deal closes you will get $80. You make $4 plus the dividends that you collect. At $.33 a quarter and a 9-12 month close you’ll get another $1 or $5. Depending on how fast they jump through the regulatory hoops, you will earn between 6.5 and 13%. I believe thsi is the proverbial “fat pitch.” Plus a 2009 closing moves the gains many months away.

On the darkside I think Flowers Foods is headed lowerwhen it preannounces or reports on May 22nd. FLO is basically a bread manufacturer.It sells at an all-time high! It is a good company, but is facing headwinds. Nobody else in its industry has avoided those winds. The big guy, Interste Bakeries is in bankruptcy and continuing to do poorly. In the past several days a host of similar companies have reported and all did horrible.JJSF had eps down 25% due to rising costs, especially flour.LANC was a disaster; about a third of the company is bread. Same reasons.LNCE saw eps down 90% due to flour and vegetable oil price increases. TSTY did twice as bas compared to ’07 for the same reasons.

Unless FLO has a lot of long term contracts, or they are much better than their competitors in passing on price increases, they will have problems. Flour, oils, sugar, electricity, and diesel for the delivery trucks all have been on a rampage. BUD had problems. Those commodities have been damaging.All of the prementioned companies were selling well off their 52 week highs before earnings. Not FLO. It keeps going up. I think it will fall pretty hard.

I’m tired of typing and feel the coctail hour is near so happy trails to you.
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