<<I started an initial position in KO about
2 weeks ago and have been terrified ever
since...... I am feeling all butterflyie
In my opinion, the only time you need to worry about
a stock is when you buy into something that is
flakey.... like some small new company that promises a cure
for cancer. Other than that, price is the most
important ingredient. You have time on your side... I have
been buying KO lately too.
Schroder analyst Andrew McQuilling wrote in a
July 8 research note that the company's working
capital deterioration has added up to about $660 million
since 1995 (mostly in accounts receivable). If Gillette
could bring its working capital levels in line with
competitors, it could free up more than $1.7 billion in cash
over the long term. That money could be spent on
acquisitions or new products. (McQuilling rates Gillette
shares a buy and his firm hasn't done recent
underwriting for the company.) "While [former chairman and
CEO] Alfred Zeien is entitled to claim the lion's
share of the credit for the success of Mach 3 and Ultra
batteries on the new product side, Michael Hawley's
opportunity to leave a lasting mark on Gillette can come
through improving the company's operating efficiency,"
In the short term, however,
inventory-paring means a slowdown in manufacturing, which would
nick earnings and margins. And for a company that's
already disappointed investors with lower profits, that's
not an appealing proposition. "It's a question of
whether the Street will overlook that," says Steven
Ralston, an investment manager with the BlackRock Group
Large Cap Growth fund, which owns more than 250,000
Whatever measures Gillette puts
into place over the next few quarters, Steele says the
process of closing factories and shifting production is
difficult. "There probably isn't going to be a seamless
transition," he says. And that means Gillette could see some
more earnings pain before things get better. "You
follow the cash flow and do the balance sheet
calculations and it gives you stronger or weaker confidence in
forward estimates," Banc of America's Steele says. "Right
now, I'm not getting the green light."
receivables ratios exceed competitors'
A spokesman acknowledges the problems
but declines to comment further. Referring to
receivables, the spokesman says the company needs to be "more
effective" but wouldn't comment on what specific steps it
For years, Gillette coasted along
nicely and no one asked hard questions, not even the
nonesuch of Nebraska (Warren Buffett's Berkshire Hathaway
(BRK.A:NYSE) owns about 8.5% of Gillette's shares and he sits
on its board). In 1998, the company launched the
much ballyhooed billion-dollar Mach 3 razor. But
something else happened while the Mach 3 was wowing the
hirsute: Markets in Asia and Latin America, where Gillette
has significant sales, took a dive.
have suffered since. In the second quarter, operating
profit at its Braun shaver unit fell more than 76%.
Toiletries profit fell 36%. And stationery profit fell 56%.
Only blades and razors recorded higher operating
earnings, up 8.4%. In the third quarter, things aren't
looking much better: The company said recently it expects
to report a 1% drop in sales due to continued
weakness at Braun and stationery, as well as the strong
The disappointing performance has
prompted analysts and investors to scrutinize Gillette's
balance sheet, and many aren't thrilled with what they
have found. "When the top line and earnings aren't
growing as fast, people start poking around to see what
else is running a temperature," Invesco's Godfrey
What they found was that the company's
capital wasn't being allocated as efficiently as its
peers'. Scott Mullinix, senior analyst with American
Express Financial Advisors, notes that adding Gillette's
1998 inventories of $1.6 billion to receivables of
$2.9 billion, results in a sum of $4.5 billion, or
some 45% of the company's $10.1 billion in sales. By
contrast, Colgate's (CL:NYSE) latest-year inventories and
receivables totaled about 20% of sales, and Procter &
Gamble's (PG:NYSE) added up to about 16%. American Express
funds recently sold the bulk of its Gillette shares.
This isn't a totally fresh problem for Gillette -- the
company's inventories and receivables totaled between 40%
and 42% of sales during 1995, 1996 and 1997, too. But
it's not getting better. In the second quarter, while
inventories improved a bit, it took an average of 59.6 days
to pay accounts receivable, up from 52.1 days in the
same quarter a year ago. And growth in receivables
outpaced sales growth. Banc of America's Steele says there
were "no signs of significant improvement" on the
balance sheet during the second quarter.
addressed the issue for the first time in its
second-quarter conference call this summer. In the transcript,
Gillette said that sales of many of its products -- Braun,
Paper Mate and Waterman pens, and Duracell -- "have
significant seasonality issues ... this impacts receivables
and inventories." However, "senior management has
made working capital management a top priority, and
targets have been established for each operating unit."
Its recent reorganization should help, as will the
closure of 14 factories and 12 warehouses, Gillette said.
Cracking the Books II: Gillette's Cash Management
Sets Some Observers on Edge
10/19/99 11:02 AM ET
For years, Gillette (G:NYSE) could do little wrong in
the eyes of investors.
It would soup up a razor here and a ballpoint pen
there to increase margins. Or, it would swoop down and
capture new business, as in 1996, when it bought
Duracell. Even after falling more than 30% this year and
seeing earnings estimates come down, the company's stock
still boasts a multiple of about 29 times 1999 earnings
and 26 times 2000 earnings estimates.
Gillette's balance sheet may be signaling more trouble
For the past several quarters, analysts
have been grumbling about Gillette's capital
management, namely its levels of inventories and accounts
receivable. Not only is that a drag on current earnings,
threatening the stock's trading multiple, but doing something
about it could actually be painful. That puts
management, led by new Chairman and CEO Michael Hawley, who
took over in April, in a bind.
to maintain warehouses of inventory (things such as
raw materials, supplies, work being processed and
finished goods that haven't been sold). Not surprisingly,
investors don't like to see high levels of inventory.
But alas, for Gillette, any effort to work off that
extra stuff on the shelves may hurt, too -- and not in
the quick, rip-the-Band-Aid-off way. "If you seek to
reduce [inventory] over time by slowing down facilities,
you'll compress gross margins," says William Steele, an
analyst with Banc of America who rates Gillette shares
market perform. "My concern is that analysts' estimates
assume too fast gross-margin growth." Nor, he says, can
Gillette's problems be solved with a one-time charge. "You
can't write off inventory and say it's obsolete,"
Steele says. His firm hasn't done recent underwriting
for the company.
Nor are investors too
thrilled about high levels of receivables -- the money
owed to Gillette but not yet collected. The longer it
takes someone to pay, the greater the chances of
default. And collecting on those debts would give Gillette
more cash. "Therein lies the potential," says Mark
Godfrey, an analyst with Invesco Funds, which owns
Gillette shares. "If they can roll up their sleeves and do
some tough work, pull back on their credit terms,
lower receivables, they can squeeze some more working
capital out of the system," he says.
You'll should be fine with EMC and KO (longer
EMC's valuation makes me
nauseous though. We will likely see the impact, IF ANY,
for the loss of business due to the HWP break. I also
worry that IBM can finally create some competition for
EMC. Further, IBM can subsidize storage profit
shortfalls to get the business for their vast array of other
products and services.
It has already
seen a nice bounce off the low. Anymore, I favor great
companies that have sold off ahead of vs. risen into
earnings for trading. Of course, if these are both
"investments", who gives a flip what they do tomorrow?
Well, I will begin with a confession. I have been
living a lie for about two weeks and can no longer live
with this charade. I started an initial position in KO
about 2 weeks ago and have been terrified ever since.
It is only by some miracle that the stock didn't
tank completely since I bought it.
I did some
digging for today's bizarre price movement in the heels
of a downgrade. Coca Cola Enterprises reported
earnings today. Their profits rose 20%. They earned 24
cents vs. 21 cents estimated. Said that Europe going
back to normal and soda price hikes are helping the
Also KO raised to outperform by
Schroder & Co with price target of
Tomorrow both my EMC and KO are reporting. I am feeling
all butterflyie inside. If you all can do me a favor,
stock up on some Coke and by an EMC storage system. Any
little bit you guys can do will be greatly appreciated.
Brent Jesko, associate manager of the $2.2
billion Strong Opportunity Fund, says the portfolio is
now slightly underweight in technology stocks, mostly
out of concern of high valuations, but partly also
out of concern over Y2K risks. While he deems those
risks small, "that small risk becomes a bigger issue
because of the high valuations."
Stocks in the
fund that still look good at current prices, Mr. Jesko
says, include American Power Conversion, which makes
power-backup devices for server computers, and Parametric
Technology, which makes computer-aided design software. (Did
you see PMTC today up 12%...the chill seems to be out