Stock Stories

How can we talk about the beverage giants without first talking about Pepsi?  Pepsi is not just about the iconic soda brand.  They also sell Gatorade, Fritos, Cheetos, Tropicana, Quaker Oats, and a host of other products.  Contrary to Coca-Cola, their strategy has been to diversify in both food and beverages.

Here is the book about the chip industry referenced in the podcast.

Crunch!: A History of the Great American Potato Chip

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Note: Some links are affiliate links, which means I may earn a small commission if you purchase anything using it.

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Hanlon's Razor, similar to Occam's Razor, is a philosophical tool we can use to "cut down" a situation with potentially many logical explanations to just one that has a high probability of occurring.  By not automatically assuming mal-intent when negative outcomes occur, we can often uncover the true source of the problem, which is often due to negligence.

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This is one of the most successful firms on the planet.  3% of all liquid consumed on Earth (including tap water) is sold by The Coca-Cola Company.  Today's episode is somewhat longer than usual - simply because, with a history and business model like this, there are a lot of great things to study.  We get into how Coca-Cola came to be, and how the company has innovated throughout the decades to remain successful.  We also discuss the challenges that the company faces going forward and its attractiveness as an investment.

Here is a link to a great video profile that National Geographic did on how Coca-Cola's products are made and packaged.

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One of the largest retailers in the United States, Target has become known for it's "upscale discount" atmosphere, experience and products.  Throughout the latter half of the 20th century, Target experienced incredible growth as it expanded across the country.  However, it is currently facing pressure to grow in the midst of strong competition (like Amazon), and has not grown sales or profits in several years.

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Waste Management is the largest solid waste collector and processor in the country.  They collect and process trash and recyclables.  In this episode, other than the regular financials and history, we talk about the importance of financial transparency and straight talk from management.

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Republic Services provides trash and recycling collection and transfer services.  They own landfills and recycling centers.  The waste management industry is vital to how we operate in modern society, but often goes unnoticed.  We all consume things, and there are by-products to what we consume that need to be processed and recycled.  Republic Services is one of the largest companies that does just that - and they do more than pick up your trash in the morning.

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Things should be made as simple as possible, but no simpler.  This mindset can help clarify our decision making and our interpretation of data.  Occam's Razor is a philosophical tool used in many fields to make our thinking processes more efficient and effective.

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Regarding the reference about investor's expectations influencing a stock's price, check out Phil Fisher's: Common Stocks and Uncommon Profits and Other Writings.

*Note, this is an affiliate link.  If you purchase the book Stock Stories  may earn a small commission.

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Colgate-Palmolive - it's what you think about when you think about toothpaste.  In fact, its products are bought by over half of the world's households.  They've been around for almost a quarter of a millennium.  Though not fast growing, it is probably the most stable profit engine that I have studied.  With a dwindling share count, increasing dividends, and a strong international presence, CP is one of the few companies that I have researched that I can say I believe will be around in fifty years.

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Ross is the largest "off-price" department store in the United States.  They sell mostly women's clothing, but also clothes for men, shoes, home accents, etc.  Although they have been around in some form since 1950, their rapid phase of growth did not start until the late 80s.  Ross is a higher growth large business that has sales and profits that continue to increase in recessions.  What returns can we expect if we pay up for growth?

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Ford is one of the largest automakers in the world and is famous for its brands such as the Ford F-Series, Mustang, and many others.  It is the largest family owned business in the world and makes cars, trucks, and other vehicles.  Below are some notes from my analysis:

• Current share price in October 2018: around $9.20 per share
• Total shares outstanding as of 2Q 2018: 3,998,000,000 shares
  • So total market cap right now is about $38 billion
• Expected earnings in 2018 to be $1.30-$1.50 per share, which is a P/E of 6-7x
• Cash net of debt (including marketable securities of Ford Motor Corp. but not of the credit business) is $9 billion.
  • This equates to $2.25/share in cash, which is a decent amount.  Really though it is a negative cash position of -$115 billion when accounting for all short and long term debt on the balance sheet.  This is -$28.00/share in debt.
  • The amount of net cash the company had in 1987, when Peter Lynch wrote about it, was $8.3 billion.  So the cash position has gone up and down over time, but is significantly lower now when accounting for all debt.
• Ford Credit earned $2,300,000,000 in pre-tax profit in 2017.  In 2018 it earned $1,286,000,000 in pre-tax profit in the first half of the year.  It looks like based on the most recent trends that it will earn around $2 billion for the whole year of 2018 (although sales of cars and trucks tend to slow down a little bit by the end of the year).
  • If we do what Lynch did and analyze Ford Credit as a stand-alone financial company, we apply a 10x multiple to the earnings. 
  • So, Ford Credit is worth around $20 billion.  Dividing this number by the shares outstanding, we see that the financial business of Ford is worth around $5.00/share.
• So, let's put this together.  Current share prices for the business is around $9.20.  The net cash position is worth nothing.  The financial business is worth around $5.00.  9.20 - 0 - 5.00 = 4.20.  This equates to the car business being available for purchase for $16.8 billion.
• Comparison point from the past, at the beginning of 1994:
  • Ford had 464 MM shares outstanding (common stock).
  • Only 940 MM in profit for 1993, so $2.02 per share.
• 1984: $2.9 billion in profit
• 1985: $2.5 billion in profit
• 1986: $3.2 billion in profit
• 1987: $4.6 billion in profit
• 1989: $5.3 billion in profit
• 1990: $0.8 billion in profit
• 1991: ($2.2 billion) loss
• 1992: ($7.3 billion) loss
• 1993: $2.5 billion in profit
• Income from the Financial Services segment steadily grew over time throughout this whole period - Ford increasingly financed a higher percentage of cars, even though the total number of cars sold fluctuated a lot.
• Share count has hovered at 3.9 billion over the past several years - no change expected but dilution will likely occur if Ford starts to burn a lot of cash
• Dividend has fluctuated a lot up and down over the past several years - this is the way Ford does things and is likely to continue.  A dividend cut is almost certain when the next recession strikes.
• In 1987 the business made $8.92/share assuming full dilution.  That year it traded between $28.50 and $56.37.  That is a P/E ratio of between 3 and 6. 
• The P/E is between 6 and 7 right now - so it is no unreasonable for the share price to drop in half from here if profits (and dividends as well) fall.
• Lesson: Peak Earnings Trap - the raw P/E number tells you the stock is cheap, but that may just mean that the business has reached a high point in the cycle with its earnin

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