Drip
Portfolio Report
Tuesday, December 16, 1997
by Randy Befumo
([email protected])
ALEXANDRIA, VA (Dec. 16, 1997) -- Today we take a look at Nabisco Holdings (NYSE: NA), one of the two food companies attached to major tobacco refiners and distributors.
Description: In 1995, investors got another chance to own Nabisco. Although RJR Nabisco Holdings (NYSE: RN) still maintains approximately 81% of the economic interest and 98% of the voting power, the initial public offering of 50.2 million shares put the company back on the radar screens of food-oriented investors everywhere. With the capital raised by this offering, the company has started to acquire branded food products in foreign markets, much like other major diversified food concerns. The company, simply put, is absolutely huge. Each of its divisions is about the same size as many of the food companies we have covered.
Major brands include: The company is structured in seven major groups. National Biscuit is the largest manufacturer of cookies and crackers in the U.S. and owns Oreo, Chips Ahoy!, Newtons, Ritz, Wheat Thins, Triscuits, Air Crisps, Nilla wafers, Stella D'Oro, Better Cheddars, Cheese Nips, and Barnum's Animal Crackers. Nabisco Biscuit has also made an entry into the snack isles with its SnackWell's line of fat-free snacks.
The Specialty Products unit is a mixed bag of brands including A1 Steak Sauce, Grey Poupon, Milk-Bone pet snacks, Cream of Wheat cereal, Eggbeaters, and Royal desserts. The LifeSavers unit owns not only LifeSavers, but BreathSavers, Bubble Yum, Fruit Stripe, Now & Laters, Care*Free, and assorted other candy. The Planters unit does nuts; the food service unit sells to food service providers; and the Nabisco Tablespreads Co. does Fleischmann's, Blue Bonnet, Parkay, Touch of Butter, Chiffon, and Move Over Butter brands of margarine.
Core Moneymaker: LifeSavers is big, with more than 5% of the non-chocolate candy market. The company also has a lock on margarine, as well as on cookies with Oreo and Chips Ahoy!.
Financials: Because this is an overview, we'll only look at a few key things: how is the company priced relative to sales, earnings per share, and the expected growth rate (valuation); what are the current operating and net margins (margins); how much long-term debt does the company have (leverage); and what does management do with the cash that it generates (capital allocation)?
Valuation, Growth, and Share Performance: At $46 1/4 per share, Nabisco's market cap is $12.4 billion (share price multiplied by 269 million shares outstanding). With trailing sales of $9.5 billion, the company trades at 1.3 times sales (which is the market cap divided by the trailing sales).
Nabisco has $102 million in cash and $4.3 billion in long-term debt. The enterprise value of Nabisco (enterprise value was described a in our Dec. 4 report) is closer to $10.0 billion, and that value in relation to sales is 1.75. This is lower than we have seen with many companies, but probably reflects the rather large debt-load the company has as well as the fact that the shares do not have full-voting power over the company's operations.
On the earnings per share side, Nabisco trades at 33.8 times trailing earnings per share. The stock trades at 29.8 times earnings estimates for this year and 25.4 times fiscal 1998 estimates. Given the company's rather screwed up accounting, the debt burden, and the number of acquisitions made recently, looking at it on the basis of earnings would probably be a mistake. If we decide to look further into Nabisco, we will have to look at the cash flow the company generates. We will decide whether or not to dig deeper based on the enterprise value to sales ratio.
Margins Reviewed: Again, operating earnings divided by revenue gives us the operating margins. This number shows what the company is earning after the cost of the product and all the costs of running the business are subtracted. It indicates how efficient management is at running the business "operations" -- hence, operating margins.
For the last twelve months, Nabisco had $9.5 billion in sales and $984.0 million in operating income, giving operating margins of 10.4%. Although below what we have seen from other food companies, again we must recognize that the amortization costs resulting from the company's whacked out capital structure and recent acquisitions suppressed earnings.
Leverage reviewed: With $4.5 billion in long-term debt and $9.4 billion in sales, Nabisco has a 47.9% debt-to-sales ratio. This is very high and we will need to examine this pretty closely if we decide to take a further look at the company.
Capital allocation: The Nabisco dividend is 1.5%, which is about average for an S&P 500 companies. The company has been directing most of its cash flow to acquisitions and paying down debt, repurchasing very little stock.
The Snapshot for Nabisco:
Ticker: NA
Recent Price: $46 1/4
Trailing 12-month sales: $9.5 billion
Trailing 12-month oper. earnings: $984.0 million
Operating Margins: 10.4%
Trailing 12-month EPS: $1.37
Fiscal '97 EPS estimates: $1.60 (only one quarter away)
Fiscal '98 EPS estimates: $1.82
Enterprise value to sales: 1.75
Current P/E: 33.8
P/E on 1998 EPS: 29.8
P/E on 1999 EPS: 25.4
Yield: 1.50%
Conclusion: It is really hard to tell right now what to do with Nabisco, although given that the shares do not represent a voting interest in the company, we will probably pass on these ultimately unless they are really, really, really cheap.
--Randy Befumo
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TODAY'S NUMBERS
Day Month Year History Drip (0.60%) (4.14%) (14.34%) (14.34%) S&P 500 0.48% 1.32% 30.69% 1.76% Nasdaq 1.07% (2.97%) 20.29% (2.56%) Last Rec'd Total # Security In At Current 12/01/97 6.082 INTC $81.346 $71.188 11/14/97 1.000 JNJ $62.125 $65.313 Last Rec'd Total # Security In At Value Change 12/01/97 6.082 INTC $494.72 $432.94 ($61.78) 11/14/97 1.000 JNJ $62.13 $65.31 $3.19 Base: $900.00 Cash: $389.75** Total: $888.00 GOAL: The portfolio began with $500 on July 28, 1997, adds $100 on the 15th of every month, and the goal is to grow the port to $150,000 by August of the year 2017. |
