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Geetanjali Gamel's  Instablog

Geetanjali Gamel
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I am an individual, self-taught investor with a Masters in Economics. I like playing with data and mostly focus on finding companies that are undervalued and provide good opportunities for investment, but at times will also look into high growth companies with compelling stories despite their... More
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  • Walgreens: Not Leaving On A Jet Plane

    The price of Walgreens (NYSE:WAG) shares plummeted after the company announced that it had no plans to shift its headquarters overseas as part of its acquisition of Allianz Boots and take advantage of the "inversion loophole". The company's management cited reasons like the burden of IRS scrutiny as well as public and media backlash as drivers of the decision. The move may be considered patriotic by some, but did not get the stamp of approval from disappointed shareholders. Wall Street expectation was that Walgreens would follow the footsteps of several other corporations that have acquired companies located in countries with lower corporate tax rates primarily for the benefit of slashing their U.S. tax burden. But Walgreens was not alone in forgoing the overseas tax advantage and retaining its headquarters in the homeland. Agricultural giant Archer Daniels Midland (NYSE:ADM) also decided to move its headquarters to the Chicago area despite rumors of a possible move overseas associated with its recent purchase of Swiss food ingredient producer Wild Flavors.

    While these companies refrained from this lucrative but ethically ambiguous option, there are many others who have leveraged it. A recent article in the Wall Street Journal reports that this has been the chief motivation for approximately 66% of international deals announced this year. Corporations such as pharmaceutical company AbbVie have initiated mergers with foreign counterparts in the recent past that could result in large tax dollar savings. So I have been wondering if this was a smart move or a missed opportunity for Walgreens.

    Anyone reading the news will see that this topic is heating up in Washington. President Obama has expressed his resolve to tackle this loophole and prevent U.S. companies from "gaming the system". Although any substantial executive action may be easier said than done in the near term, the issue is definitely on the radar. So for a business that is estimated to earn a sizeable chunk of its revenue from Medicare and Medicaid program prescription sales, picking a fight with Washington may not be the greatest idea. Since Walgreens is such a universally recognizable brand, there is greater awareness and somewhat higher exposure to backlash from the government and general public compared to other companies that may not have as much direct consumer recognition. So in the case of a possible inversion investigation, large PR costs would likely be piled on top of legal costs.

    Additionally inversion deals could lead to greater burden of corporate gains tax on shareholders even without selling any shares when they receive shares of the new corporation. There are ways to mitigate this impact, but it is another case in point that this route may not be an obvious win for shareholders as it appears to be initially.

    The debate over whether it is justified for companies to evaluate the option of inversion deals or not, and what would be the optimal way to dissuade them from it, is not likely to be resolved easily. In the case of Walgreens, while the initial shareholder response to the decision was negative as manifest in its stock price decline, for the long term investor the focus should remain on fundamentals and growth.

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am a self-taught individual investor and this article expresses my views based on my own research and is not professional investment advice. I am not being influenced or paid by any organization to write this article.

    Aug 07 7:03 PM | Link | Comment!
  • Going Organic

    Walmart recently announced that it was partnering with Wild Oats to sell organic foods in their stores at prices 25% below other organic food brands. If successful this could be a game changer in the organic foods world, typically understood to be a niche market for a premium paying customer. In this regard Walmart has a potential goldmine of untapped customers who shop on a budget and have been keeping away from organic foods due to the cost factor.

    The opportunity that lies open before Walmart is a market that currently makes up about 4% of total grocery sales in the United States and is expected to grow to 5% by 2019. The largest components of these sales are produce and dairy. In the case of dairy, the share of organic to total milk sales ratio in the United States has grown from 1.92 in 2006 to 4.38 by 2013. Interestingly during this period, except for the year 2009, there has been a decline each year in total milk sales while sales of organic milk have been increasing. Since around that time consumers were feeling the direct hit of the Great Recession on their personal finances, it may be possible that it led to a cutback in the purchase of higher priced organic milk. However the fact that every other year the consumption of organic dairy has increasing might suggest that the status of organic foods as "luxury" grocery may be changing. And Walmart could benefit by taking it even further in affordability to a growing number of customers who are willing to try it. In fact Walmart's own survey indicates that 91% of their customers would be willing to buy organic foods if they were available at more reasonable prices.

    But the question is whether the reduction of this price premium by Walmart will pose a threat to the Natural foods stores that have so far been out of reach for a majority of customers. The typical customer who shops at such stores is already willingly paying a higher price not only for their grocery, but also for the ambiance, the healthy cuisine in-store restaurants, and so on. So natural food stores can probably keep this group of customers even if Walmart offers a more competitive price. However, it is the potential "converts" who are not buying organic foods at present but would try it at a more reasonable price that could open up a still largely untapped market with great growth potential.

    Tags: WMT, organic food
    Apr 21 12:50 AM | Link | 3 Comments
  • Out To Dinner

    The restaurant industry suffers the brunt of economic downturns when households scale back their spending on discretionary items like eating out. Alternatively a pickup in restaurant sales and traffic would suggest that consumer confidence and the employment situation is beginning to improve. Recently the National Restaurant Association released their Restaurant Performance Index that touched a five month high of 101.2 in November 2013. This was also its ninth consecutive monthly reading above 100 which indicates expansion in the underlying metrics. Additionally 57 percent of restaurant operators reported gains in same store sales over the prior year and 47 percent reported a rise in customer traffic, which is an uptick from October.

    Capital spending is also expected to continue growing as restaurant owners spend on maintenance and upgrades to attract customers. Well known casual restaurant chain Applebee's announced that it will be installing tablets in all its restaurants by the end of 2014 that will enable customers to order high-margin drinks and appetizers and pay their bill through the devices, cutting down on service wait time. Others like Buffalo Wild Wings and Chili's have also been testing the advantages of introducing tablets at their restaurants. This suggests that restaurant owners also have enough confidence in consumer demand to make investments in their businesses now.

    On the jobs front too, employment at food services and drinking places grew at a healthy pace of approximately 3.3% year-over-year on average in 2013. These appear to be positive signs of economic recovery as consumers show the ability and willingness to spend discretionary cash on restaurants.

    Jan 07 12:11 AM | Link | Comment!
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