Diligence overcomes difficulties, sloth makes them.
- Benjamin Franklin
I would like to wish my regular readers and the SA community a Happy Thanksgiving. Hope the holiday treats you and your family well. I decided to pen one more article before heading to the market to pick up some final touches for Thanksgiving dinner tomorrow. I am hosting the event with some friends at my place this year and I am looking forward to the company, the fixings and watching my Cowboys lose yet another game in the closing minutes they have no business dropping.
Maybe it is remembering holidays past that has gotten me a bit nostalgic today, but I can't help but feel that there is something really wrong with this country right now. It is hard to put a finger on it but I think we are losing our individuality, self-reliance, work ethic and our ability to work with people that we disagree with. Things seem to have changed for the worse over the last thirty years, especially in the last decade.
Going through high school and college, I worked 25-40 hours a week in various jobs (stockboy, teller, waiter, data entry). I left home before my 18th birthday to move into the dorms at college and I roomed with friends until I could afford a place on my own. I graduated college without a lick of student debt and joined a large corporation and then spent the next 20 years climbing the corporate ladder. At the time, I did not consider my journey special as it was basically what everyone I knew was doing as well. In short, my path was non-remarkable. It was called "paying your dues" and seemed as normal as waking up in the morning.
Something has definitely changed over the last couple of decades. It seems nowadays you see a lot of 25 year olds still living at home. They seem indignant that they cannot find the job they envisioned after spending 7 years to get a degree in aboriginal studies or some other nonsense and racking up $80,000 in student loans. They kvetch via twitter on their smartphones while sipping their skinny pumpkin spice lattes at Starbucks (What ever happened to regular coffee?). They are very upset at the unfairness of it all and wonder why government is not doing something to fix their situation.
The news has been full of stories about post-election rancor and non-stop talk about the "fiscal cliff" over the last few weeks. However, the story that has caught my attention is the bankruptcy of Hostess, the maker of the iconic Twinkie. To me, the unfolding drama that will result in over 10,000 job losses represents everything that is wrong with the country right now. All the players share the blame for not finding a way to prevent this from happening. The fact that they haven't is a symptom of what is affecting America at large.
The Private Equity Guys: Ripplewood Holdings put in $130mm to save the company from bankruptcy in 2009. It seemed like a good fit as the firm was run by a major Democratic donor who thought he could have good relations with the unions. The firm consulted with former Democratic heavyweight and labor favorite Richard Gephardt and even put the pol's son on the board for $100k/year. Unlike many other acquisitions by private equity firms, it did not load Hostess with extra debt to pay itself a dividend to get its equity back.
Ripplewood could be faulted for upping management's compensation needlessly and not bringing in experienced managers from within the industry. It also could be taken to task for not getting at least $100mm more in concessions from the unions prior to emerging from bankruptcy and believing it could have a constructive relationship with the Teamsters and Bakers Unions just because they were on the same side of the ideological aisle. For their trouble and naiveté, the PE firm will lose most if not all of their original investment. The firm is also being currently demonized by the leader of the AFL-CIO who stated earlier this week "What's happening with Hostess Brands is a microcosm of what's wrong with America, as Bain-style Wall Street vultures make themselves rich by making America poor."
The Unions: The leadership of the unions seem more interested in seeing that concessions that need to be made to save the company are not granted to avoid a precedent that could be applied to other firms in the industry, rather than saving the jobs of thousands of workers. There is also no give in work flexibility. For example, insisting two trucks go to every delivery even when one has the capacity to service the customer. They also seem unwilling to deal with the over $50mm in workman's compensation expenses that exist at Hostess.
The Workers: They don't want to believe the reality of the situation and rather lose their jobs than take any wage cuts or have to pay more for their health insurance. I empathize with their situation, but the reality is that they are being paid above the market rate for their skill sets and the company will go bankrupt without reducing labor costs. I may be old fashioned, but a job paying somewhat less seems better than no job at all.
I think this is where government policy comes into play. Over the last four years we have vastly expanded our welfare and foodstamp populations. We also have increased unemployment insurance to cover 99 weeks from 26 weeks before the recession. The workers might be making a logical short-term decision, although one that bodes ill for their longer-term job prospects. For a few dollars less per hour, adding up all the government entitlements, it might make sense to sit at home on the couch eating Twinkies rather than making them for a while.
Summary: There is plenty of blame to go around as this 82 year old company sinks toward liquidation and thousands lose their jobs. The fact that the sides cannot come together, make some concessions and do the hard work necessary to find a satisfactory solution says a lot about the current state of our society. We no longer need to produce the Twinkies, we have become the Twinkie.
As this is a stock picker's community, I have two actionable thoughts. First, the continuing stress in the low end of the job market as well as the $120B worth of tax relief "Payroll tax holiday" that looks like it will expire at the end of the year should be good for the dollar stores. My favorite in the space is Dollar Tree (DLTR) for reasons that mimic a recent article by a fellow SA author. Second, the housing market recovery looks real. This will mean increased demand for the hard physical labor that Americans seem less and less inclined to want to do. Given the administration's courting of a key and growing voting block, I think this will mean increased immigration to fill this demand. This should be good for remittances and I like Western Union (WU) as a result. At six times trailing earnings and an almost 4% yield, the equity seems like a good value pick.