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Smart Investing Newsletter Archive*

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Although It's National Candy Month, These Stocks Look Sour

Thursday, June 8th, 2017

Hershey (HSY): Sell
The company has many well-known names including Reese’s, Jolly Rancher, Kit Kat, Twizzlers, and Ice Breakers to name a few. While the name brands are strong, the valuation ratios look weak. The current P/E stands at 48.9, nearly double the industry average of 25.7. Price/Sales of 3.2 is also well above the industry average of 1.3. Price/Tangible Book is not material but is the same as the industry average. This is most likely due to goodwill on the balance sheet from acquisitions. Finally, Price/Cash Flow of 27.4 is well above the industry average of 15.8. Investors receive a dividend of 2.1%, but the payout ratio of 83% is troublesome. The balance sheet is off to an alright start with a current ratio of 1.1, but Debt/Equity of 341.97% is frightening. Looking forward to December 2018, estimated GAAP EPS of $5.16 would give us a target sell price of $85.14.

 

Mondelez International, Inc. (MDLZ): Sell
The company also has many notable names including Oreo, Toblerone, Cadbury, Trident gums, and Halls candies. The valuation ratios for MDLZ do not look appealing. The current P/E of 41.8 is far above the industry average of 25.7. Price/Sales of 2.7 is above the industry average of 1.3. Price/Tangible Book is not material and is the same as the industry average. This is most likely due to goodwill on the balance sheet from acquisitions. Finally, Price/Cash Flow of 31.0 is nearly double the industry average of 15.8. Sales for MDLZ have declined 8.6%, while the industry average has increased 1.0% during the same time frame. This is a negative as we like to see a company’s sales grow faster than the industry average. Another major concern is the company’s liquidity. It has a current ratio of 0.56 and a quick ratio of just 0.39. Debt/Equity of 71.6% looks alright, but the liquidity is a huge question mark for the company. Looking forward to December 2018, estimated GAAP EPS of $2.65 gives us a target sell price of $43.73.

 

General Mills (GIS): Sell
The company has many great names including Fruit by the Foot, Gushers, Fruit Roll-Ups, and many others. The current P/E of 21.0 is below an expensive industry average of 25.7. Price/Sales of 2.1 is above the industry average of 1.3. Price/Tangible Book is not material and that is the same as the industry average. This is most likely due to goodwill on the balance sheet from acquisitions. Price/Cash Flow of 14.8 is below the industry average of 15.9. The company pays an attractive dividend 3.4%, but it uses nearly 70% of earnings to pay that dividend. The balance sheet is very weak as there is little liquidity with a current ratio of 0.72 and a high debt/equity of 239.3%. Looking forward to May 2018, estimated GAAP EPS of $3.22 gives us a target sell price of $53.13.

 

PepsiCo Inc. (PEP): Sell
On top of its popular soft drinks, Pepsi owns well known snack brands including Frito Lay which owns Cracker Jacks. Many of the valuations do compare favorably to the industry average. The current P/E of 25.2 is below the industry average of 28.4. Price/Sales of 2.7 is below the industry average of 3.4. Price/Tangible Book is not material and that is the same as the industry average. This is most likely due to goodwill on the balance sheet from acquisitions. Price/Cash Flow of 18.3 is also below the industry average of 19.5. The company’s sales growth over the last 12 months is minimal at just 0.5%, but EPS has grown nicely at 32.4% during the same time frame. While a current ratio of 1.25 looks good, problems begin with a Debt/Equity which stands at 334.15%. Looking forward to December 2018, estimated GAAP EPS of $5.51 gives us a target sell price of $90.92.

 

 

1-800-Flowers.Com (FLWS): SELL
In addition to the delivery of flowers, the company also provides other products including popcorn, chocolates, and specialty treats. A major strength for this company is the balance sheet as the current ratio is 2.1 and the Debt/Equity is very low at 5.7%. Sales have grown 1.9% over the last 12 months, but EPS has fallen 36.2% during the same time frame. The current P/E of 28.8 compares favorably to the industry average of 48.6. Price/Sales of 0.6 is below the industry average of 0.8 and Price/Tangible Book of 4.3 is also beneath the industry average of 8.5. Price/Cash Flow of 11.1 is the only valuation measure that is above the industry average of 10.1. Looking forward to June 2018, estimated GAAP EPS of $0.50 gives us a target sell price of $8.25. 


Do you have a question or a company you'd like us  to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.