Yesterday, confectionary mogul Wrigley
Diluted earnings per share (EPS) for the fourth quarter declined a jaw-dropping 19% to $0.42. No need to keep you mouth agape, however; $0.10 of the drop was due to an expected supply-chain restructuring charge. That still leaves pro forma earnings flat year over year -- not exactly appetizing for a stock with a P/E of 27.6.
Moving up the income statement, gross margins were down 170 basis points to 54.2%, mostly due to the aforementioned restructuring costs. The rest of the difference comes from the lower-margin products acquired from Kraft
The stock does sound pretty uninteresting if we only take a one-quarter perspective. Unwrapping a little more of the story should present a clearer picture.
One factor that must be taken into account: the more than $1 billion in debt Wrigley took on for last year's acquisition. Interest income of $4 million per quarter has totalled nearly $15 million so far, putting a further drag on earnings. The massive amounts of free cash flow produced will most likely allow the company to consistently take big bites out of the debt, even after shelling out big bucks for the yearly dividend. As predicted, the company increased its dividends again, raising the yield to 2%.
Even though there may be a few uncertainties in the acquisition, I'm pretty certain that gum-chewing won't be going the way of the dodo. In fact, the newly acquired brands provide the company an opportunity to be a bit more creative in new product launches. Wrigley has already launched eight new products this year, including three extensions of the new, recently acquired brands. Product extensions have been beneficial for Hershey
While the P/E ratio looks extremely high for a company expected to grow only 11% for the next five years, the stock hasn't been a true bargain for quite a few decades. A P/E in the low 20's was seen only a handful of times over the past decade. Producing market-crushing returns may be unlikely at this point, but I'd rather invest in a handful of companies that have the potential to do so, rather than invest in an index fund. I don't believe Wrigley is quite ready for that designation, but I'll be watching to see how investors react to some problems that will most likely be short-lived.
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Kraft is a Motley Fool Income Investor recommendation.