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Geoff Gannon August 22, 2006

On Pilgrim’s Pride and Gold Kist

On Friday, integrated poultry producer Pilgrim’s Pride (PPC) publicized its offer to acquire smaller rival Gold Kist (GKIS) for $20 per share. The offer values Gold Kist at roughly $1.16 billion including the assumption of $144 million in debt. The $20 a share cash offer represented a nearly 55% premium over Friday’s closing price of $12.93.

Since the offer was made public, the market price of Gold Kist’s shares has risen to $19.88.

Going Public

On Friday, Pilgrim’s Pride put out a press release that included the text of a letter delivered to Gold Kist’s board (that same day). In the release, Pilgrim’s Pride claimed it has “substantial current liquidity” and that its financial advisors have given the company “further assurances” that Pilgrim’s Pride has the ability to finance the transaction.

The release also suggested the transaction would be accretive to EPS in the first full year following the merger; the combined company would enjoy approximately $50 million in anticipated synergies. During 2005, Gold Kist had sales of over $2.3 billion while incurring Selling, General, and Administrative costs (SG&A;) of just $112.2 million. So, these anticipated synergies would likely come from the cost of goods sold line. Pilgrim’s Pride suggested as much in the release by stating such synergies were “expected to come primarily from the optimization of production and distribution facilities and cost savings in purchasing, production, logistics, and SG&A;”.

A Fair Price?

The letter to Gold Kist’s board is generally unremarkable, being full of the usual platitudes such as “value creation for our respective shareholders, employees, business partners and other constituencies”. Considering the price at which Gold Kist currently trades, the limited expected synergies, and the fact that the current proposal is for an all cash deal, it seems far more likely Pilgrim’s Pride is looking to create value for its shareholders by capturing the wide spread between the market price of Gold Kist and the company’s value to a 100% owner.

Pilgrim’s Pride shouldn’t be faulted for trying to exploit such an opportunity. However, investors shouldn’t view the deal as a value creating combination when it is clearly an opportunistic attempt to buy something for less than its worth.

The letter did state that Pilgrim’s Pride is “willing to discuss alternative forms of consideration, including a mix of cash and Pilgrim’s Pride common stock”. We’ll see what this means in the days ahead.

I suspect it means some small amount of stock as a sweetener rather than a radically different mix of cash and stock. The reason for this is obvious. Shares of Pilgrim’s Pride are probably worth a lot more than their quoted price; so, a deal consisting of a large amount of stock in place of cash would actually be a big step up in the true amount of economic consideration given in exchange for Gold Kist’s operations.


Now, some may argue that this deal is aimed in large part at capturing synergies rather than exploiting a difference between the price and …

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Geoff Gannon August 21, 2006

On Homebuilders

Bill of Absolutely No DooDahs began his May 31st post entitled “My Homeys” by writing the following:

“Rarely has there been a single segment or industry as universally loathed as the one I’m writing about today. Almost every stock I’ve screened from this industry has double-digit negative 52-week returns and short ratios over a week to cover. This industry’s P/E is below 5.5 on average, and its PEG and Price/Sales are 0.4 and 0.5 respectively. This industry’s Price/Book ratio is hovering close to 1.3, a rarity for a set of businesses with double-digit Return on Assets. I’m talking about, of course, the homebuilders.”

Bill has written three excellent posts about homebuilders. I highly recommend reading them, especially because you will find I’ve sprinkled quotes from those three posts throughout the post you’re reading now. There’s no need to re-invent the wheel. If Bill said it better first, why shouldn’t I quote him instead of struggling to find a different way to say the same thing?

Here are Bill’s three posts (in chronological order):

My Homeys

I Value My Homeys

DHI – One of My Homeys

A Contentious Topic

Although nearly three months have passed since Bill wrote that paragraph, it remains an appropriate introduction to a contentious topic. I’ll try to take the discussion in a slightly different direction by presenting some questions (and hopefully a few answers) that seem most likely to help investors form actionable judgments about the homebuilders.

Naturally, the first question is why housing in general and homebuilding stocks in particular are such a contentious topic. Two culprits immediately spring to mind: self-interest (enlightened or otherwise) and the financial media (almost certainly otherwise). These two forces have a hand in the forming and fomenting of a great many controversies. So, it’s hardly surprising to find them at work here.

The self-interest is genuine. Many Americans own a house. Some Americans own more than one house. This second group is probably somewhat more likely to watch CNBC, read The Wall Street Journal, etc. So, the financial media takes that kernel of genuine self-interest and blows it ups.

The manner in which it does this is particularly interesting, because it affects the way Americans in general and investors in particular think about the subject.

Discussions of the housing market often involve talking heads and statistics. The talking heads naturally present opposing views. The statistics are, of course, meaningless without a point of reference.

Obviously, a series of historical data could provide such a point of reference; however, a series of historical data is complex, backward-looking, and above all else not a good way to keep an audience’s attention. In contrast, estimates are simple, forward-looking, and a bit more exciting. So, estimates win out. Not just in the reporting on the housing market, but in financial reporting as a whole. Estimates pervade the financial media.

While they can be very useful, estimates do carry the unfortunate side effect of turning shades of gray into either black or …

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Geoff Gannon August 18, 2006

A Question About One of Phil Fisher’s Books

A question was posted in the Value Investing Encyclopedia about one of Phil Fisher’s books. I couldn’t answer it, because I’ve never owned an original copy of Conservative Investors Sleep Well. I was hoping one of the blog’s readers might be able to answer this question:


Amazon says that Conservative Investors Sleep Well is 180 pages long, but the version in Common Stocks and Uncommon Profits and Other Writings is only 50 pages long. Do you know whether this is an abridged version?


If you know the answer to this question please click the “comments” link below. Thanks.…

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Geoff Gannon August 8, 2006

Some News Items and Worthwhile Articles


The nation’s largest rent to own operator, Rent-A-Center (RCII), will acquire Rent-Way (RWY) for $10.65 a share in cash. Rent-A-Center values the transaction at $567 million – much of the purchase price is attributable to the assumption of long-term debt. Rent-A-Center is certainly an interesting business; the stock was quite a bit cheaper a year ago.

Press Release

Warren Buffett’s Berkshire Hathaway (BRK.B) reported its financial results for the second quarter of 2006. As had been widely reported, catastrophe writing increased substantially.

Reuters / 10-Q


Leucadia National (LUK) made a few changes to its investment portfolio. Leucadia added shares of Eastman Chemical (EMN), started a new position in Lucent (LU), reduced its holdings in Parkervision (PRKR), and sold out its position in UAL Corporation (UAUA).

GuruFocus / 13-F

Bill Miller of Legg Mason Value Trust (LMVTX) said that fund had a “dreadful” second quarter. His quarterly letter to shareholders cited two very different mistakes regarding homebuilders and energy stocks. Value Trust was too quick to invest in homebuilders – and too slow to invest in energy companies.

Miller acknowledged that Amazon (AMZN)eBay (EBAY)Yahoo (YHOO)Expedia (EXPE), and Google (GOOG) “have traded off on some degree of angst about company-specific near-term issues.” However, in his opinion, “these companies represent superior economic franchises with the ability to earn above the cost of capital as far as the eye can see, and the market’s myopic, obsessive focus on what is going on for the next three or six months doesn’t alter the business value.”

Baltimore Business Journal / Quarterly Letter


About a week ago, Rick of Value Discipline wrote an excellent post entitled “Returns Accrue When Accruals Don’t”. The post discusses the relationship between net income and cash flow from operations. I highly recommend reading both the post and the three comments to it. It’s a very important concept – and as Rick points out, it’s not the sort of thing you’ll hear about on CNBC.

Post / Visit Value Discipline

Bill of Absolutely No DooDahs takes on another important yet rarely discussed topic, share buybacks. I can’t say I agree 100% with every point Bill makes in his post entitled “Buying it Back Yet Again”. However, I do agree with his method of taking a logical look at an operation most investors simply assume is as wholesome as apple pie. Buybacks are a topic I really should take up on this blog at some time, especially because some of Bill’s criticisms are perfectly valid.

Post / Visit Absolutely No DooDahs

George of Fat Pitch Financials notes that he bought some Realogy (H), one of the two spin-offs from Cendant (CD). Realogy and Wyndham Worldwide (WYN) were spun off from Cendant in the hopes of unlocking shareholder value.

As many articles, broadcasts, and blogs have noted, breaking up conglomerates has become almost as popular as assembling them. Well, that’s probably an overstatement. Breaking up a …

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Geoff Gannon August 3, 2006

Quarterly Newsletter

The latest newsletter issue (for Q2 2006) is now out on PDF. Those who purchased the issue should have received an email with the PDF attached. If you had purchased the issue and have not yet received the PDF, please email me.

The printed copies of the newsletter will probably arrive in about two weeks. The exact delivery date will depend on where you live. If you live overseas, it will likely take quite a bit longer.

I hope you enjoy the latest issue.

As always, feel free to email me if you have any questions. I know the new suggested prices presented at the end of each write-up may be a bit confusing at first. However, I do think this method is preferable to providing no guidance whatsoever or to trying to apply a rigid buy / sell / hold system.…

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