Seeking Alpha

Suman Chatterjee's  Instablog

Suman Chatterjee
Send Message
Financial analyst-writer for the last 3 years. Writes for a number of financial publications including The Street, Motley Fool and Seeking Alpha. Completed his Bachelors in Business Administration (Finance) with GPA 3.0, currently pursuing Chartered Accountancy from ICAI, India. Specializes in... More
My blog:
View Suman Chatterjee's Instablogs on:
  • Kellogg Buys Pringles - Time For Snacks!

    On 15th February, Kellogg Company (NYSE:K) announced its agreement to acquire Proctor & Gamble's (NYSE:PG) "Pringles" for $2.695 billion. Quite a huge investment, it is supposed to be a great addition to the global snacks business of the company.

    Pringles' brand strength and consumer appeal alreadyadd sufficiently to Kellogg's high-quality snacks brands, most notably Keebler, Cheez-It and Special K Cracker Chips, further providing leverage in the international market. Apart from making Kellogg second largest snacks maker after PepsiCo in size, it would also put around 1200 skilled employees at Kellogg's management's disposal.

    "We are excited to announce this strategic acquisition," said John Bryant, Kellogg Company's president and chief executive officer. "Pringles has an extensive global footprint that catapults Kellogg to the number two position in the worldwide savory snacks category, helping us achieve our objective of becoming a truly global cereal and snacks company. We are delighted to welcome the employees of the Pringles organization to Kellogg. Their collective passion and commitment has resulted in Pringles' well-deserved acclaim as one of the most recognized brands in the world."

    It seems everybody is hopeful about this new deal. The share price of Kellogg Company rose by over 5% on 16th February, and it is the highest since early November, when the company posted disappointing results and curtailed its 2011 financial outlook.

    Adding Pringles is expected to increase the global snacks revenue almost equal to that from the cereal department. So adding Pringles will only strengthen the company's sources of revenue.

    As Edward Jones analyst, Jack Russo says, it must be noted that the cereal business does face a lot of competition from General Mills and other private label brands.

    "It's a win-win," Russo said. "It gets Procter more focused on where they need to be and it's additive to Kellogg's earnings."

    And with this new surge of optimism, I would expect that the company will notice some steep rise in its stock price, currently trading at $52.53 on 19 February, 2012, in the future. Good for the investors!

    Moreover, in this health-conscious market, with the "100 calorie", "fat free", "multigrain" and many such healthy versions, Pringles definitely has a strong appeal to health watchers as well, which might add few more millions in the revenue.

    Who knows if this turn out well, the company might shoot for the world-famous snacks brands of Diamond Foods (NASDAQ:DMND) as well? In an interview with Reuters, John Bryant declined to comment on his company's interest in Diamond or any of its brands.

    As you already know, due to some accounting glitch, Diamond Foods couldn't take over Pringles and is facing US government litigation at the moment. My common sense says, somebody is going to get Diamond Foods very soon.

    And last but not the least, the financial statement matters. How does this "Pringles" deal affect the company's financial statements? Let's look at the company's last quarter financial highlights once.

    The company earned total revenue of $3 billion last quarter, up by 6% in the same quarter last year. It's year-over-year sales growth of 4.5% definitely brings a smile to our faces. But what about the operating profit margin? Although its operating profit increased by 20.5% last quarter, the year-over-year graph shows a decrement of (2.9%) in 2011, which is not inspiring at all.

    Even gross profit margin seems to have dropped to 41.3% in 2011 from 42.7% in 2010. The gross profit margin in the last quarter, standing at 40.9%, is still lower than 41.6% in the same period of 2010. It can be concluded that although sales are going up, the profit margin is somehow being compromised with. And it seems, the company is mainly hit in the North American and the European region. This new deal just might help to bring back the rhythm in the above mentioned regions once again. After all, Pringles is the fourth-largest brand of snacks in the world, with 2.3 percent of the market. In the United States, it ranks eighth with 2.5 percent.

    Moreover, this new deal will fetch the company over $400 million in tax benefits, and might help in increasing the bottom-line of the company. In short, I would say this might turn out to be a nice deal for Kellogg. I am routing for Kellogg this time!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: DMND, PG, K, long-ideas
    Mar 02 5:53 AM | Link | Comment!
  • Personal Letter To Mark Zuckerberg

    Everyone is talking about Facebook IPO these days. Well, a debut with a market cap of around $100 billion sure captivates attention, compared to Google's (NASDAQ:GOOG) debut of $23 billion, which raised just $1.67 billion in 2004. Facebook is aiming straight for $5 billion on the first delivery.

    With 845 million active users, 483 daily active users, over 425 mobile active users and 100 billion friends on the social network, Facebook is certainly a big player in the industry. Now, the time has come for Facebook to go ahead and prove itself in front of the whole world.

    Here are a few concerns that Facebook probably faces in the future, obstructing its path to success.

    • If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed;
    • We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business;
    • Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results;
    • Facebook user growth and engagement on mobile devices depend upon effective operation with mobile operating systems, networks, and standards that we do not control. ;
    • We may not be successful in our efforts to grow and further monetize the Facebook Platform;
    • Our business is highly competitive, and competition presents an ongoing threat to the success of our business;
    • Improper access or disclosure of our users' information could harm our reputation and adversely affect our business;
    • Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. May of these laws and regulation are subject to change and uncertain interpretation, and could harm our business;
    • Our CEO has control over key decision making as a result of his control of a majority of our voting stock;
    • The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business;
    • We anticipate that we will expand substantial funds in connection with tax withholding and remittance obligations related to the initial settlement of our restricted stock units (RSUs) approximately six months following our initial public offering;
    • The market price of our Class A common stock may be volatile or may decline, and you may not be able to resell your shares at or above the initial public offering price; and
    • Substantial blocks of our total outstanding shares may be sold into the market as "lock-up" periods end, as further described in "Shares Eligible for Future Sale." If there are substantial sales of shares of our common stock, the price of our Class A common stock could decline.

    Although economists and analysts doubt Facebook's greatness, I am routing for Mark. After all, I am an avid user of Facebook, with around 3000 friends and 2 FB pages. And just as a sign of respect and support, I write a short letter to Mark below, from a user's view point.

    "Dear Mark,

    I totally understand your reasons. Don't you worry; we are all there for you…as long as you don't start charging a membership fee for being on Facebook. That could really mean problem for you, if the "next big thing" suddenly pops out of nowhere.

    You should also watch out Google and Twitter. I totally like how you have incorporated the "subscribe" option in Facebook, which more or less gives us the same benefit as Twitter does. Moreover, it's definitely not as noisy as Twitter. Regarding Google Plus, you might not have to worry now. But do keep a watch all the time.

    Why? Google has a nasty habit of integrating each and every of its products and services, and it does well nonetheless. Talk about Google Offers, and Google is already doing better than Facebook Marketplace. It's highly likely that Google might try to incorporate Google Plus in every Android piece. Sadly, this will eat away from your user base over time. And when we have come to the smart phone and tablet business, you should also lookout for Apple (NASDAQ:AAPL). It's definitely going to launch a few goods and services of its own for the iPads it sells.

    We all know that mobile advertising is your weak point. Focus on it.

    Nevertheless, it's going to be hard. Why? We all see Facebook as a hangout place. It's the only place online where you expect to have "disturbance-free" communication. If you wish to include more ads, it can only hamper the user experience. Again a glitch! Of course, your advertising reach and revenue is over that of Microsoft (NASDAQ:MSFT) and Yahoo (NASDAQ:YHOO), but still a long way to go.

    Moreover, you have around 12% of your annual revenue coming from Zynga (NASDAQ:ZNGA). Have you ever thought about the instance if Zynga were to pull out from sharing games and applications on Facebook? Please do give it a thought.

    Lastly, your revenue per registered user is around $4.39, compared to Google's $30, Yahoo's $7 and AOL's (NYSE:AOL) $10. It's seriously something you got to work toward, if you are to survive in the future. The public listing will lead to immense pressure on the profitability ratios of the company. So better buckle up!

    And just before ending the letter, I thank you once again for creating such a wonderful online place.

    Regards,

    Ron."

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 12 10:26 AM | Link | Comment!
  • Amazon: I Am Not Concerned About Your Numbers

    Investors are furious as to why Amazon (NASDAQ:AMZN) doesn't mention the "numbers" as Apple (NASDAQ:AAPL) does. Apple is pretty open about the fact that it sold 15.4 million iPads last quarter. So why would Amazon not reveal anything? How many Kindle Fires and how many Kindle e-readers were actually sold the last quarter?

    My question, is it really worth knowing the number? No, even Barnes & Noble Inc. (NYSE:BKS) doesn't reveal the numbers. If Barnes & Noble start revealing numbers and then stop it somehow, it would raise skepticism and negative awareness among the investors. Perhaps, this might be the reason why Amazon doesn't reveal numbers.

    Frankly speaking, knowing the number of Kindle products sold is not going to help us at all. Whether you sell one product or a million products is really not my concern. But how much margin you are being able to snag from the transaction is what I am worried about.

    And that's where Amazon is being rather disappointing to say the least.

    The popularity of Amazon lies in the low prices offered on the products. And that is precisely very problem with Amazon that it offers super-low prices. Even lower than it should.

    Why?

    Any company should know beforehand how to reach the break-even point (NYSE:BEP) at least. That's the point where the cost of production is equal to the selling price. And Amazon still seems to learn a lot about it.

    The average selling price of a Kindle tablet is $199. It's been estimated that the cost per Kindle Fire unit is around $202. We can add say, another $10 in marketing and promotional costs and $5 in shipping and delivery costs. The total cost of production totals to $217. So the operating loss per unit is around $18 per unit (around 9 percent loss margin).

    Now, as noted in an International Business Times article, the operating loss margin might be covered by cross-purchases or consistent purchases of digital and physical products and services over the next two quarters approximately. But doesn't that mean the company is creating a backlog somewhere? If some of the customers relinquish from Amazon purchases in the future, then what? What about the new loss accumulation? If you think from that perspective, it seems as if the company might not be able to show positive results ever for the time to come.

    Moreover, looking at the last quarterly financial chart of the company, the sales have gone up by 37% in North America (which is still lower than 45% in the same quarter last year) and 31% in the international circuits. You can safely conclude that the "numbers" have gone up over the last year. But does it improve the company's bottom-line? No, not at all. And that's what matters.

    To add to that, the biggest competitor of Amazon competitor in US, eBay Inc. (NASDAQ:EBAY) showed an operating margin of 20.37% last year, compared to the meager 1.79% of Amazon.

    I am not really concerned with the "quantity". After all, quality matters!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 02 11:36 PM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »

Latest Comments


Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.