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Andrew Heyl
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Education: BA Economics; JD Law Experience: I have been studying economics and public companies for more than 20 years. Value Investor. Disclosure: My articles and comments are solely my opinion, not an investment recommendation or solicitation, and may not represent the views of my... More
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  • Thoughts On Coca-Cola

    All human beings love Coke. Although I have known this fact from my earliest recollections (my mother drank Coke for breakfast until her death at 91), I somehow managed not to own a share of stock of Coca-Cola (NYSE:KO) until recently. There was the New Coke debacle in the 80's that put me off owning shares for a number of years (a lost opportunity), and then there was always the thought that it was overpriced for a value stock. More recently I was worried about the effects of a Sugar War that was started by health conscious Americans against fast food and sugary sodas in their quest to end obesity. Coca-Cola is high on their hit list and a lightning rod for their wrath.

    The Sugar War reached its zenith last summer when New York City Mayor Michael Bloomberg imposed a ban on soda drinks of more than 16 ounces. A group of New York sugar addicts rebelled and formed the "Million Big Gulp March" (in reality a few dozen), who protested in front of City Hall. When late night comedians took up the fight in favor of the sugar people, the writing was on the wall. President Johnson said "If I've lost Cronkite, I've lost Middle America." In current jargon, when you lose Jon Stewart and Bill Maher, forgetaboutit.

    Soon after the ban, litigation was started and New York Judge Milton Tingling declared the law unconstitutional, finding that the ban was "arbitrary and capricious", and also that the mayor should have gotten a vote by the city council. The case is now under appeal. It does not matter how the appellate court eventually rules, the war has already been lost. Coca-Cola has won again. I should have bought shares at that time, but didn't. I waited until after I saw a program on Bloomberg television in which newswoman Trish Regan was on a whale watching trip with Sir Richard Branson. Yes, this is the same Sir Richard Branson who founded Virgin Records (his first multi-million dollar business), when he was a teenager. As Richard and Trish were lounging on Richard's whale watching yacht, after swimming with the leviathans, Trish popped the big question and asked Richard what his biggest business failure had been. Without hesitation Richard responded that it was Virgin Cola and readily admitted that he had underestimated the power of Coca-Cola, and that Virgin Cola didn't have a chance competing against it. At that point I decided to buy Coca-Cola.

    Seeking Alpha contributor, Prasad Capital Management, recently published an excellent article about Coca-Cola;

    The article used a number of relevant metrics to show that Coca-Cola's stock is currently cheap by historical standards (it also mentioned that Warren Buffet bought Coca-Cola at a PE of 20). Coca-Cola is of course an iconic brand and -- regardless of whether it is overpriced or underpriced -- it will continue to grow. The growth will primarily be in the emerging and frontier markets, since Coca-Cola has pretty much saturated the developed world. Muhtar Kent, chairman and chief executive officer of Coca-Cola, is the perfect person to lead the company in this growth. Kent started with the company in 1978 and has spent most of his life working in the area where Asia, Africa and Europe join. Asia, Africa and Europe form the largest land mass in the world with a huge population. It is also where you find emerging and frontier markets. The land mass and its population dwarfs the Americas. Kent knows this area well, and it is no coincidence that he has been chosen to lead Coca-Cola.

    On June 4, 2013 Coca-Cola put out a press release that it was investing $200 million dollars in a bottling plant in Myanmar. If health conscious Americans, Mayor Bloomberg, and Sir Richard Branson can't beat Coca-Cola, 60 million Burmese don't have a chance. It you haven't already done so, quit fighting it and buy Coca-Cola. I bought on March 13th. I'm up 4.3%.

    Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Tags: KO, long-ideas
    Jun 16 7:35 AM | Link | Comment!
  • The Case For Cliffs Natural Resources

    Cliffs, like all the major iron ore miners, has taken a beating since it reached a triple peak in its share price in the first half of 2011 at a little over $100 per share. Iron ore reached it's monthly price peak in February 2011 at $187.17, and then declined steadily to a monthly price bottom in September 2012 at $99.47. Since then there was a steady climb in ore prices to February 2013, when the monthly price reached $154. It then declined to the present price of about $130.00. (see The bounce from the September 2012 low to the February 2013 high was substantial, but the stock price was somewhat lagging the ore price and did not come close to approaching it former highs. Then came the 4th quarter report, with the dreaded dividend cut, a huge charge off of it's recent purchase of Thompson's Iron Mines, and a proposed issuance of common and mandatory convertible preferred stock. (and oh yes a possible labor strike!). Even though there was a warning about the write off, and anyone following the stock should have known a dividend cut was probably advisable and at least a possibility under the present iron ore price predictions, it was too much for many stock holders to stomach, and the massive sell off began. I speculate management decided to get all the bad news out in one blow, rather than dribble it out over a year or two. In any event, it certainly did the trick in getting the stock price down, if they are interested in buybacks and cheap prices.

    There are several reasons for Cliff's present dilemma. First and primary is of course the decrease in iron ore demand and price, over the last 2 years, which has hurt all the iron ore miners. The second is that Cliffs, as did most the major players, purchased properties at the peak of the iron ore boom. This of course resulted in buying at inflated prices, which they, like several other of the major miners, decided to write down last quarter. The result being a massive one time loss.

    Cliffs major purchase was Consolidated Thompson's Iron Mines, Ltd., for a purchase price of $4.9 billion. Approximately $1 billion of that price was written off in the recent quarter, causing the loss. (although to a certain extent it was a paper loss, not actual, since a good portion was for good will). Without that write down, Cliffs would have had a annual net profit of over $100 million. Which in light of the decline of iron ore prices would not have been too bad. Never the less the sticker shock of the loss was too much for most shareholders to stomach and they ran for the hills. The dividend cut was also a no no for the stock price. Watch Jim Cramer on the subject. Shareholders just can't handle it. Ironically the $2.50 dividend had only been declared a year earlier. They would have been well advised to have kept the old dividend and declared a special dividend. If that had been done I doubt the fall out would have been as catastrophic.

    Cliffs proposal to issue preferred and common shares seems like a prudent way to solve any potential capital problems in the event the worst happens and the price of ore tanks again. This restructuring is a bit complicated, and I imagine many shareholders didn't try to figure it out and just bailed instead. In summary the preferred shares pay 7% and are mandatorily convertible in five years. This might be the best way to investment in Cliffs at this time. Unfortunately, this type of restructuring of capital is more than a bit unusual and, along with the other actions, didn't help the share price. Although the restructuring does dilute the shares, If the income is used to pay off debt it may be somewhat of a wash. In conclusion, the way this was handled by management has resulted in a decrease in the share price way below the company's tangible book value of $30. At this price it does indeed look cheep.

    The only thing at this time that would seem to be against holding the stock, is the almost unanimous speculation that the price of ore is again going to tank at the end of 2013, although not quite as bad a last year. Most believe it will stay between $110 and $130, good enough to still make a profit. The primary reasons for the decline being the anticipated slow down in China, and the anticipated increase in production that is scheduled to come on line in the next several years. With regard to China, who knows, or can even be assured of how accurate the figures are. From what I read China is planning on moving some 300 million people from the farm to the cities in the upcoming years, which is about the present size of the US population. Regardless of how many empty apartment buildings they have, 300 mil sounds like a lot of infrastructure. With regard to the number of iron ore developments coming on line, I think the speculators have not taken into account as to how many of these will be delayed if the iron ore price doesn't rise. Many of the projects like the Ring of Fire in Canada, are going to need a lot of infrastructure themselves including a rail road, if it is going to be feasible. The easy developments are long gone. I've read a number of articles from the major producers who are making rumblings about production cuts on less profitable projects. On March 11, Cliffs announced it was reducing some of its pellet capacity. As most people who follow commodities know, stopping and starting production is usually a multi-year event, which accounts for the wild swings in prices. Price is pretty much self-righting like a sailboat. There have been a number of report of new mining opportunities in recent months, but from what I read, they will all require time to develop and, more important, lots of money. It does seem that at some point in time there has to be a lot more demand if the world population continues to grow and develop. China with a population of 1.5 billion would be 5 times the present US population, India with 1. billion would be more than 3 times, and Indonesia coming up on the outside. If you have time to wait you might want to simply buy here, collect the dividends which are still 2.75% at the present price, and wait for the population boom to make you right.

    There is one more reason that Cliffs might have a silver lining and that comes by the name of Zenyatta Ventures, in which Cliffs has a significant amount of stock. Zenyatta has discovered what is thought to be one of the largest vein graphite finds in the world. If this turns out to be true, the profit could be huge. Until we find out more about the find, Cliffs' potential profit from such a development is highly speculative, but it is something to be watching. I did talk to a company spokesman about Zenyatta, but other than acknowledging their interest, they wouldn't give me much information, since this was in their exploratory subsidiary and they don't give out information on exploratory projects, for obvious reasons.

    Disclosure: I am long CLF.

    Mar 19 10:16 PM | Link | Comment!
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