Monday, November 19, 2018

Packaged Foods: The Guy Shorting Kellogg's (K; GIS; CPB)

With Campbell Soup, and their Dan Loeb-activist drama, reporting earnings tomorrow it appears the brand-name food companies are drawing attention.
We have some experience with theses things.

From Institutional Investor, November 15:

Cereal Killer
Short-seller Eiad Asbahi has tangled with the likes of Warren Buffett. Now, with his big bet against Kellogg, he’s going up against another American icon.

In late 2016, short-seller Eiad Asbahi was riding high. His tiny hedge fund, Prescience Point Capital Management, had zigzagged its way to an annualized return of nearly 29 percent since 2009. Asbahi cranked out thick research reports skewering roll-ups, China-based frauds, and other flawed businesses his fund bet against. He bested Warren Buffett by shorting Chicago Bridge & Iron Co., a construction company with questionable acquisition accounting that the Berkshire Hathaway chief executive was unwise enough to invest in.

On the morning of November 9, however, Asbahi’s wagers went awry. With the surprise election of Donald Trump, it was clear financial regulation was going out the window. Suspect companies that Prescience Point was shorting like auto lender Credit Acceptance Corp., under investigation by authorities, soared in the weeks after the election. The fund lost 31 percent for 2016, its only calendar-year deficit.

“We were caught naked,” says Asbahi, 39, in his sumptuous office overlooking an upscale commercial strip in Baton Rouge, Louisiana. “Politics matter to the type of investing we do, and they can matter in a very big way.”

Asbahi did not pull in his horns. He continued to blast companies with searing research. The move has paid off: His fund is on a tear, up 41.3 percent net of fees year to date through October. 
Asbahi raised the stakes on April 26, unveiling Prescience Point’s highest-profile short campaign yet. He published a 39-page report on cereal juggernaut Kellogg Co., pointing out that several recent accounting and operational moves were artificially bolstering revenue, understating company debt, and padding operating margins.

Kellogg’s maneuvers are spelled out in the company’s financial filings, he notes. By extending payment terms for customers, Kellogg is encouraging them to buy more now than they normally would, Asbahi argues. Eventually the buyers will need to rein in their purchases.

And Kellogg is also slowing its payments to suppliers, temporarily bolstering operating cash flow. Soon, it has to stop.
“We expect that they will have to pay the piper,” Asbahi says. “Accounting excesses always unwind.”

Prescience Point forecast that Kellogg shares, then trading at $60.95, would fall by more than a third to Asbahi’s target of $39.50.

Asbahi aired his pitch on Bloomberg Television. “The company is a lot less profitable, much more expensive, and much, much more highly indebted than the financial statements convey,” he said. “It won’t be able to meet its guidance targets, and it’s going to be forced to decide whether it wants to cut its dividend or maintain its credit rating.”

Kellogg stock dropped 7.1 percent over the next week, to $56.65. Shares then rebounded, climbing to $74.84 by mid-September.

Asbahi was sanguine — in a September letter to investors, he wrote that the fund had doubled its short position when Kellogg’s share price hit $74. On October 31, Kellogg announced that higher expenses in part due to the rollout of single-serve Pringles and Cheez-Its, combined with higher shipping costs, would result in flat operating margins. It sharply lowered earnings guidance too. The stock fell 9 percent, to $65.48....

The first time I read about the single serve Pringles I thought they were referring to individually-wrapped crisps, sort of an industrial potato-flour extrudate/artisanally-wrapped fusion thing.

Previously on the "Is it really food" channel:
March 7, 2017
M&A In European Food
I'm not sure that consumer packaged goods is the area to be in, at least not in the U.S. and not based on names like Kellogg or General Mills.
For a quarter-century those manufacturers ratcheted prices as though they were tobacco companies but people find it easier to give up their Cheerios than their cigarettes.
The managements milked that approach for pretty much all it was worth so, as operating entities, they aren't all that attractive but someone will decide the only thing left to do is to asset strip or dividend recap the life out of the former cash cows.
Top o'the market to ya.... 
Sept. 7, 2018  
Packaged Goods: So, What's New at Campbell Soup? (CPB)
August 30
Packaged Goods: ""Why 149 year-old Campbell Soup is at a crossroads" (CPB)
May 18, 2018
More Trouble In U.S. Packaged Food: Campbell Soup Down 12% (CPB; GIS; K)
For the last couple years we've been using Kellogg and General Mills as proxies for the group:

K Kellogg Company daily Stock Chart
General Mills
GIS General Mills, Inc. daily Stock Chart
The problems however extend through the entire sector.

CPB Campbell Soup Company daily Stock Chart

May 3 
The Disaster That Is American Packaged Food (K; GIS)

Not talking nutrition here, just shareholder wealth destruction.
We've been posting on the profit potential on the short side for the last couple years and things have only gotten worse for the former giants over the last few months:...
The David Says Eat More Packaged Food (and short the stocks)
Packaged Goods: "...America's Venerable Food Brands Are Struggling"
Nine of the World's Biggest Packaged Food Companies Have Launched Venture Capital Units
"Hungry for Investment: Big Food Races Toward Startups"
Dealflow: "New Investors Flock To Food"

And many more. Use the 'Search blog' box if interested.