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Now if you are a parent to toddlers, chances are that you bow down to the educational mountain that is Sesame Street. In our house we have two children under the age of 4, and, in my humble opinion, Elmo's World is consistently funnier than most TV sitcoms.
As a parent, I'm not thrilled about the prospect of the likeness of Elmo and Cookie Monster on snack-food containers. This can only add stress to our toddler-in-tow grocery store visits. But from the Keebler investor's perspective, these furry critters should be a valuable revenue draw. After all, cookies and crackers are often impulse purchases. Let's see, kids and impulses -- anybody see a connection?
Since 1996, Keebler has made two strong additions to its line of branded cookies and crackers. The acquisition of Sunshine Biscuits in 1996 added Cheez-It, Hi-Ho, and Krispy. The 1998 acquisition of President International added the Famous Amos name and turned Keebler into the leading supplier of Girl Scout cookies. Talk about buying what you know! Buy Sesame Street snacks for your she-toddler today, and, before you know it, you'll find yourself buying Girl Scout cookies from her (somehow this doesn't quite seem like a reciprocal relationship but, hey, we're investors, not parents, in this space).
What can we learn from Keebler's just-released 10-K filing? For a company that has just slogged through two major acquisitions, Keebler's balance sheet looks pretty good. Here are some highlights:
Fiscal Year Ending 1/00 1/99 1/98
Foolish Flowie 0.75 0.99 0.80
Inventories (% of rev) 6.6% 7.5% 5.5%
Total Debt (millions) $456 $654 $299
Cash to Debt $0.05 $0.04 $0.09
Debt to Equity 1.12 1.99 1.35
The Flowie and inventory trends are impressive, particularly for a large operation that has subsumed two companies and a host of new product lines in the last three years. The Keebler Flowie even meets the stringent Rule Maker criterion for this measure (less than 1.25), which reflects well on cash management and Keebler's tightly controlled distribution system. In their 10-K business description, Keebler highlights the strategic advantage of its distribution system, pointing out that the "frequent presence of [Keebler] sales force employees [in stores] provides us with a high level of control over the availability and presentation of our products."
Debt is high, with only a nickel in cash on hand for every dollar owed, but the trend is positive as almost one-third of total debt was paid back in fiscal '99. As a result of this debt reduction, return on invested capital improved dramatically (operating profits were essentially flat, year to year).
Operations generated $197 million in cash flow last year, up 36% from the '98 figure. Confident in its current position, Keebler announced, in February, a plan to spend $30 million from future cash flow on a stock buyback plan. This is $30 million that could have been used to retire debt, so this decision reflects management's opinion that debt is under control and that Keebler stock is a bargain at the current price.
Although Keebler traces its history all the way back to 1853 and a small bakery in Philadelphia, in recent years the company has been passed around like a bag of Cheez-Its. In the current ownership scenario, parent Flowers Industries (NYSE: FLO) owns 55% of Keebler stock. Flowers Bakeries and Mrs. Smith's Bakeries are the other two operations in Flowers Industries' bushel basket.
Why buy Keebler, you might ask, when you can buy the parent company and get a large chunk of Keebler in the process? While I'm not sure of all the pros and cons, one clear downside for the average Fool is Flowers' complicated SEC filings. Compare them with Keebler's filings and I think you'll agree that investing in Keebler makes it easier to buy what you know and to follow what you've bought.
It would certainly be misleading to categorize Keebler as a high-growth stock, and the threat of increased margin pressures from powerful retail chains hangs ominously on the horizon. Moreover, Keebler has started to pay a dividend -- a possible drawback for taxable portfolios. But total sales did increase by 20% in '99, year over year, and food stocks typically do well in tough times. If you are looking for a well-positioned hedge against a recession, this solid company appears to offer reliable dividends, an improving balance sheet, and some room for price growth.
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