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April 2007




April 22, 2007 – Comments (1)

I was just looking over the balance sheet for Kraft Foods (KFT), which was spun off from the tobacco conglomerate Altria Group (MO) about a year ago.  I notice that among their assets they list $25 billion of goodwill and another $10 billion or so of intangible assets.

Not having been to school for financial analysis, I've always been a little sketchy about what these numbers represent.  The first thing that comes to mind is consumer opinion, generated by advertising and existing relationships.  Take De Beers, for instance, which is privately held and which until recently held a monopsony on the global diamond supply.  They have been doing advertising for 150 years.  "A diamond is forever."  "2 months' salary."  If you haven't heard these phrases, you haven't been paying very close attention.

Now I used to be a rock hound.  I am quite familiar with the concept of scrabbling around in the dirt and finding a pretty piece of, say, mica schist; or perhaps a chunk of malachite mixed with azurite; or a nice carnelian or rose quartz; or, say, a small piece of Arizona native copper.

But when I look at the fingers of my lady friends who have recently been engaged, I'm not seeing much malachite or mica or rose quartz or native copper, as beautiful and intriguing as those minerals may be.  I am, however, seeing a lot of diamonds.  Big cloudy diamonds, big clear firey diamonds, tiny diamonds set in the shape of a heart - all kinds of diamonds.  At a glance towards that finger, you learn just how much the person in question cares about socioeconomic status and just what echelon of socioeconomic status they're trying to project.  In my world, I'd value the girls who chose rose quartz.  But when it comes to rocks on fingers, this isn't my world.  This is De Beers' world.  And if they had to draw up a balance sheet (which they don't because they're closely held) they could insert a big fat number under "goodwill," just because of this.
Now we've all seen the Kraft Cheese and Macaroni ads.  That's right; reverse Macaroni and Cheese, get a cute kid to mispronounce it so it sticks in the memory, and maybe a dog or two in the commercial, to project safety, loyalty, fidelity, domesticity.  KFT Cheese and Macaroni will always be there, on the aisle of your local supermarket.  The consumer knows this.  Is that worth $35 billion?

Not by itself.  But think - KFT has to have relationships in place with every single supermarket that is going to stock their boxes of macaroni.  They need to have relationships in place with the trucks that are going to deliver those boxes; and they need to have factories strategically placed to create the right amount of boxes for the right region.  They need to have relationships with suppliers who can deliver enough durum wheat, enough food grade DI water, enough powdered dehydrated cheese product, enough cardboard and printer's ink every year to those factories to meet demand; and they need to have alternatives in mind so that when the durum crop fails in one region they can get enough, quickly, from elsewhere.  They need an analytical department which tests customer opinion and projects how much KFT C&M is going to be purchased in 2008 so they can start packaging and warehousing it now in the correct quantities.  And of course, they own the secret recipe, which no one else has.

And KFT has a lot of other food products, and bear in mind they create and market them essentially worldwide.  You could start a company that made macaroni and cheese, but it'd take you a gosh-darn long time even to penetrate enough markets that the Kraft accountants would start to notice your cut into their market share.

Are we getting near $35 billion yet?  I think so.  But what I'm more interested in are your thoughts, and now that I seem to have some readers of this blog, I want to take advantage.  Advertising, marketing including analysis, relationships with local retailers and suppliers, distribution networks.  What have I forgotten?  What else is making up that $25B in goodwill and $10B in intangible assets?  [more]



Squeezing Money Out Of Snake Oil

April 17, 2007 – Comments (13)

I've got some pretty snarky underperform picks out there.  MTEX, MED and HLF come to mind - multi-level marketing schemes that co-opt the incomprehensible argot of science and the retail business model of Amway to create millions of dollars a year in sales.  These companies are scams.  They're selling hope, wrapped in jargon and peddled to you by your friends.  But there's no science here, nothing to back up the inflated claims; nothing but a placebo effect, a shrill home office issuing glossy pamphlets, and in the end a drawer full of overpriced junk and busted dreams. 

"No one ever went broke underestimating the intelligence of the American public."  True that.  And honestly, in my heart of hearts, I'm probably more bullish on these companies than my picks would let on.  You'd have to be a fool to buy these companies' products - not a Fool™, just a fool - and, well, look around you.  Have you met any fools lately?  I know I have.  Hope springs eternal in the human breast, and that may well translate to eternal profits for companies like these.

But I won't be riding the stock, whether it goes up or down.  I've seen enough suffering, enough false hope, enough illness and obesity and busted dreams to last me a lifetime.  I will not be trying to profit from these things.  I don't think it's ethical, and I couldn't sleep at night if I owned a share in any of these companies.
Your mileage may vary - and that's what makes America great.  [more]

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