by Steve McDonald, Bond Strategist, The Oxford Club
Friday, March 29, 2013
In focus this week; Oreos are in the driver’s seat, watered down gas plays and the sitfa
There was a time when Oreos, yes the cookie, accounted for 50% of Nabisco’s profits, 50%! Today the cookie is under the snack food umbrella of Mondelez, a spin off from Kraft foods.
Despite the fact that snack foods, which is all Mondelez makes and sells, has the fastest growing profits in the food business worldwide, they have missed their numbers two quarters in a row.
Some would call this a bad start, but Joseph Gabelli of Gabelli and Company in a recent Wall Street Journal article, called it a growth story in the early innings.
A Citi group analyst was quoted as saying Mondelez is a prime buyout candidate, at a 20% premium, by PepsiCo.
Mondelez already gets 44% of their revenues from the emerging world and a company spokesman stated in a Barron’s article that they will be expanding into the Next Wave markets in the Middle East and Africa.
The emerging world, the Next Wave and the BRIC’s will produce 9% profit growth for the next three to five years versus 3% in the developed world, and MDLZ is perfectly positioned to capitalize on it.
What I like most about this company is that it falls into the category of a Quality Company; it is spending for future growth. In 2013 and 2014 5% of its net revenues will be invested in new manufacturing plants.
Despite the fact that MDLZ may miss earnings again in the first two quarters of 2013, Rueters is calling for annual profit growth of 12%.
Mike Foss of Brown Advisory stated that if all MDLZ does is meet the same growth numbers they had before the spinoff, it is undervalued.
MDLZ has three power brands of the industry, Dentene, Cadbury, Trident and of course Oreos, and is positioned to capitalize on the huge buying power of the fastest growing segment of the EM’s.
This one hits on all of my hot buttons; food, growth, quality, long term, lots of spending for future growth and at a bargain price.
A Look at Frack-Water Stocks
Next up, opportunities in gas and water
The Journal reported last week that Saudi Arabia, the king of oil wells, has finally relented and will be adopting fracking technology to tap into their gas reserves.
The Saudi’s were the last fracking holdouts and this may be the ultimate endorsement of fracking as thee energy development system for the next 50 to 100 years.
In the U.S. alone there are 50,000 gas and oil wells being fracked. These wells will require 70 to 100 billion gallons of water every year to operate and every drop has to be treated, transported and pumped in and out. Some of the water will be recovered and either treated at the pump site or transported to a storage facility.
In case you haven’t figured it out, water is the single absolutely required element for fracking; no water, no gas or oil. It is where a lot of money will be made.
The good news is it isn’t just about water. This boom includes pumps, chemicals, filtration, hauling and treatment. Barron’s called it the modern day equivalent of selling shovels to miners.
Simon Gottelier, of Impax Asset Management, stated in the Barron’s article that “Some of the best investment opportunities are in the suppliers helping the industry to operate more efficiently, reducing pollution, and meeting increasingly strict environmental controls.”
And the story is getting better. Environmentalists are turning up the heat on the fracking industry and that is expected to drive the development and use of better and more advanced water treatment and recovery methods.
Barron’s listed several companies that are serving the various water needs of the fracking industry. The list is on your screen now:
- Aqua America (NYSE: WTR)
- American Water Works (NYSE: AWK)
- Heckmann (NYSE: HEK)
- Veolia Environment (NYSE: VE)
- Xylem (NYSE: XYL)
- Gorman-Rupp (NYSE: GRC)
The article focused on Xylem. They have had no year over year increase in revenues, the users aren’t spending money in this area yet, but it has the broadest array of water services in what is a growing but still fragmented area.
Water, the gas business can’t function without it and it will be a huge money maker for a long, long time.
SITFA: Too Big to Fail Edition
Finally the sitfa
Living wills for banks. I’m not kidding. I had to read this article about three times before the significance of it sunk in.
Last week an Ohio Democrat, Sen. Sherrod Brown stated that there are 19,654 subsidiaries of the five biggest banks. Think about that for a second. 19,654! That’s just for the five biggest!!!! Hello!
This mess is so complex it is literally impossible to understand in life never mind if these things blow up and die. So, regulators are requiring a living will or a road map so they have a shot at unwinding them in the event of any problems.
We learned two weeks ago that officers of banks who lost trillions in the collapse of 2008 won’t be prosecuted because congress believes it may have a negative impact on the economy. Now we find out that these behemoths are so big regulators need a road map to try to follow their different divisions.
If the regulators don’t know what the different parts are or where they are, how are they regulating them, at all?