The BMW Method
Wrigley Analysis

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By ThyPeace
July 10, 2006

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As some of you may remember, I began participating in the Wrigley (WWY) direct reinvestment plan (DRiP) at the end of February. I had to make an initial investment of $500. After that I signed up for their automatic purchases and put $50 a month into it for a while. I recently increased that amount to $100 a month because I had the money to do so, and it doesn't feel quite as yucky to pay $2.50 a month service charge for a $100 investment as it does for a $50 investment.

After the most recent purchase, I own slightly more than 15 shares of WWY. 13+ of them are A shares and 2 are B shares that I acquired in a stock dividend in April (I think).

The stock continues to go down. If you look at the sixteen-year chart for it, you'll see a sharp dip in the price at right about the time that I started putting money into it. It's an interesting phenomenon, particularly when you compare it with the fairly glowing things that the WSJ had to say about its current chairman and all the research they're doing. Then again, perhaps it's the debt they're building up?

But William Wrigley Jr., who took over the business in 1999 after his father's unexpected death, has managed to turn around a company whose sales had stagnated and whose staff was steeped in doing things in the ultra-conservative manner of his father.

Suddenly the gyration in the stock price in 1998 and 1999 makes a little more sense.

While some of his ventures have flopped, Wrigley has performed well in the seven years since he took over. Sales have more than doubled, to $4.16 billion last year, profits have increased 68% overall and the company's stock has risen about 45%. Some analysts worry that the company's moves to diversify could shift its focus from the $15 billion worldwide gum market, where Wrigley is the top player.

Mr. Wrigley, now 42, has also hired outsiders for top positions, eased the dress code and encouraged employees to take risks�things that didn't happen under his father.

Sounds like quite a set of accomplishments. Heck, it -is- quite a set of accomplishments! And the stock had, until late in 2005, reflected it. So why is the stock taking a pummeling now?

Someone here speculated that the high price of sugar was wreaking havoc with this and other sugar-based stocks, suck as Coca-Cola (KO). I dunno about that. Let's have a look...

From Marketwatch on 4/25/2006,

Wm. Wrigley Jr. Co. said Tuesday that first-quarter net income dropped almost 15%, hurt by restructuring costs and lower margin contributions from the Altoids and Life Savers businesses acquired last summer.

Wrigley (WWY), of Chicago, said earnings fell to $111.9 million, or 40 cents a share, from $131 million, or 46 cents, a year ago. Excluding restructuring costs and stock-options expense, earnings would have been 44 cents a share. Analysts' average estimate stood at 47 cents, according to Thomson First Call.

Sales for the three months ended March 31 grew 13% to $1.08 billion from $950.4 million in last year's first quarter, and slightly short of analysts' average view.

In other words, the purchases they made are not doing as well as the gum they already had, and their net income took quite a hit. Growth of 13% seems like a good thing to me, but only if they can net money from it. And...

In North America, sales rose 30%, driven almost entirely by new acquisitions, Wrigley said. Sales excluding acquisitions rose 1% on essentially flat volume.

Given that, it seems to me that they made a good choice in buying those new brands. I wouldn't be terribly surprised if the integration of the brands will take them awhile, though.

So. Whose opinions might I trust (other than the esteemed members of this board, that is). Well, let's look at the analysts.

Thomas White has a giant SELL sign above the Wrigleys door. Here's what they're saying. The consumer staples team at Thomas White projects that over the next 12 months an investment in Wrigley will fall over 15%. These results should underperform the market and underperform 90% of the stocks in its industry. We recommend taxable investors sell Wrigley now and replace it with a stock we rank "most favorable."

Innnnteresting. So why do they think that? Well, that's hard to say, mostly because I don't speak their language. But the summary appears to be as follows:

WWY's P/E ratio is too high in comparison to the rest of its sector.
Another version of the P/E ratio is too high in comparison to the rest of its sector.

And then.... Valuation: Analyst Adjustments - Very Negative. Certain aspects of a company's value cannot be measured by traditional financial ratios. Our analysts attempt to be as objective as possible in their evaluations of these more subjective areas.

Uhhhhhhh. I'm sure they tried hard to be objective. But what were they measuring?

Moving on.

Profitability: Profit Margin - Positive
Profitability: ROE - Neutral
Business Momentum: Earnings Growth - Neutral
Business Momentum: Earnings Growth - Neutral

(In comparison to everyone else in its sector for all of these.)

Business Momentum: Change in Outlook - Very Negative.

I didn't know what this one meant. Here's what they say about it:

Analysts covering a company immediately adjust their earnings estimates when events occur that suggest it is appropriate to do so. Because of this, changes in consensus estimates may provide valuable information regarding the progress of the company. Within this industry, upward shifts in consensus estimates suggest superior future performance.

I think what this says is, "Everyone else thinks Wrigley is hosed, too, so we're gonna agree with them!"

There was also a chart in the analysis that compared Wrigley to the rest of its sector. It looks to me like Wrigley follows the sector fairly well, but has higher highs and lower lows than everyone else. (That could be because they're so big that they drive the sector, but I'm not sure of that.)

So I'm left with the fact that Wrigley's net income dropped and their PE ratio is too high.

That's not very much.

So.... Now what about sugar prices? Let's do some more research. Google is my friend. Sugar prices in India are at all-time highs. Sugar prices in Vietnam are dropping because of someone dumping a lot of it into the Vietnamese markets. Sugar prices in the US .... Hmmm. Okay, here's an interesting article. From, which picked it up from the International Herald Tribune:

Sugar prices climbed to match their all-time high on Thursday as record crude oil prices raised expectations for increased demand for alternative fuels like ethanol.

Crude rose to an intraday record of $75.40 a barrel Wednesday after North Korea fired a volley of missile tests.

White sugar has climbed 77 percent in the past year, partly on speculation that higher oil prices will spur Brazil, the world's biggest sugar producer and exporter, to divert more of its harvest to making ethanol.

I wonder how much it matters to Wrigley's costs? Hmmm.

From another article that was about Kraft's CEO ranting about EU trade barriers related to food commodities (coffee, sugar), we have,

EU sugar reforms, which come into effect on 1 July 2006, feature a number of concessions designed to give European sugar producers a viable future. First there was the climb-down from the original proposed 39 per cent price cut to a figure of 36 per cent, and most significantly for sugar producers, there was agreement the sector would be compensated for, on average, 64.2 per cent of this price cut.

More importantly, A one-cent per pound rise in the cost of sugar in the US costs Kraft about $8m per year, according to [their CEO].

Kraft is not nearly as sugar-focused as Wrigley. So it's probably a bigger effect for them.

Here's what our analysts (Thomas White, in case you'd forgotten) have to say about it.

The industry experienced a meager growth of 3.2% in the recently concluded first quarter, impacted by higher raw material costs, low growth rates and changing consumer tastes. Increases in fuel and energy costs also impacted the market negatively.

Mmmkay. So what else bugs you folks?

Encouragingly, the industry witnessed some mega-mergers in this fiscal year. Most notable of these are Suiza's acquisition of Dean Foods, General Mills merger with Pillsbury, and Tyson's acquisition of beef and pork giant IBP. On the other hand, Kraft Foods merged with Nabisco and sold its sugar confectionery brands in January 2005.

Why is that on the other hand? Oh, and Wrigley bought the brands mentioned here. Thomas White is silent on whether that's going to be good or bad for them, in the end.

The industry is facing serious hurdles with increased concerns about physical fitness and obesity levels in the U.S., especially in children. A recent industry survey indicated that one-third of American children are obese.

So, it appears that there are some underlying factors here. Primarily, they are: (1) sugar and other commodities necessary to make gum and mints have gotten expensive (2) mergers and acquisitions, including the acquisition of Altoids and Lifesavers, are an industry-wide response to industry price pressure (3) we're still worried about getting fat so we're not eating as much gum and candy.

I think they missed on significant factor: Americans are eating lots and lots and LOTS of chocolate these days. When was the last time you saw a new non-chocolate candy you wanted to try? For that matter, do you remember the last time you were excited about a new flavor of gum? Remember when Bubblicious came out and gum changed forever? I was in junior high, and boy, I remember it well! I still like sugar-free mint Bubblicious, though I haven't bought any in years.

This is the first time in five years that I've gone out and really looked at the information I could find about a company. Because I own 15 shares of their stock, as BuildMWell has said, I'm a whole lot more interested than I would be otherwise.

So I think they're probably right. Wrigley is probably going to continue to drop in price for a while. Hallelujah! I want to buy more of it. I'd like to own 100 or 200 shares of it in the next couple years and that will be a lot easier if the price comes down another 15%. (At 2 shares per month, it's going to be four years before I hit 100 shares at this rate, but that's all right.)

After that, it is possible that they'll continue to fall in to obscurity, of course. I have a sense that their current CEO isn't the sort of person to allow that to happen without a fight, though. I also have a sense that unlike newspapers and phones with rotary dials, chewing gum and other sweets are unlikely to ever truly go out of style.

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