WWAV, DB, PEP: Jim Cramer's Views
Jim Cramer shares his views every day on RealMoney.Click here for a real-time look at his insights and musings.
Cramer: To Grow, Members of Food Group Must Devour Each Other
Posted at 1:05 p.m. EDT on Thursday, June 30, 2016
The food group's always fascinated me. That's because it's got almost no growth but it's always been loved. Sure, there are periods where the love is tested, namely by dramatic accelerations in the economy, but ever since the Great Recession and the lack of clear-cut snap-back, the love affair's been torrid, and Thursday, it reached fever pitch.
The immediate catalyst is talk of a big bid for Hershey (HSY) - Get Report from Mondelez (MDLZ) - Get Report . Hershey is run by a trust that can veto anything, so this one's going to take a consensus. But this is a bid built of necessity. You see here's what happens with these stocks: Unless they buy other companies and rationalize them by firing lots of people and running the product through an already established distribution system, it's mighty hard to grow. The supermarket aisles are pretty much set. There's share to take from others via innovation and heavy advertising. You can spend your way into better supermarket real estate.
Still, though, there aren't going to be two more aisles for Mondelez's Oreos and Chips Ahoy. You aren't going to get another candy aisle to fit in 20 yards of assorted Cadbury candies.
So Mondelez has to grow by acquisition, which has been the way of this group for time immemorial: witness Kraft Heinz (KHC) - Get Report , or General Mills (GIS) - Get Report , which bought Quaker Oats, and PepsiCo (PEP) - Get Report with Frito Lay. You don't do a deal, you are stagnant.
So, of course, Mondelez wants Hershey because if it accelerates growth then Mondelez's stock goes up, too, as is the case even on today's scuttlebutt.
As I said last night, the group had already been in the process of being re-rated because of General Mills' robust quarter, when that venerable company announced some real growth in its core business -- cereal. How did the growth come about? Simple: General Mills is becoming more natural and organic. Removing the artificial coloring of some of the cereal results in a dramatic increase in sales, just as you would expect given the consciousness of this new generation to natural and organic and the repulsion to all things chemical and inorganic.
It's the same reason why my charitable trust, which you can follow at Action Alerts PLUS, has maintained a big position in WhiteWave (WWAV) , the natural and organic maker of plant-based drinks. Sure, I might not have discovered the company if I didn't co-own an inn in Summit, N.J., and kept running out of almond and soy milk when serving breakfast to a younger-oriented group that skewed foreign. The fact is that's a double-digit grower in a group that's so challenged for growth that you can never rule out a takeover. (Kraft Heinz, PepsiCo and WhiteWave are part of TheStreet's Action Alerts PLUS portfolio.)
The same thing goes for Kellogg (K) - Get Report , another stock that's flying both off the re-rating and the rumor mongering. In order to keep even a semblance of growth, Kraft-Heinz must do a deal. Kellogg works. It's a fact of life, companies with no growth either invent it or buy it, and when it comes to food there is no real mother of invention.
I have said takeovers will be the backbone of the second half because of the lack of growth. Consider today a gun jump, and a good one for the bulls at that.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long KHC, PEP and WWAV.
Cramer: Citigroup Has the Best Value in the Banking Sector
Posted at 7:04 a.m. EDT on Thursday, June 30, 2016
It's not like people didn't expect good news after the stress tests were announced. We've seen a flurry of these buyback and dividend boost plans after stress test results before, including in March of last year, when the Fed did not object to the capital plans of 28 of 31 banks, with only Deutsche Bank (DB) - Get Report and Santander outright failing and Bank of America (BAC) - Get Report having to re-submit.
Of course, this time Bank of America passed, but Deutsche Bank and Santander "still had broad and substantial weaknesses across their capital planning processes." (One wonders how in heck those two banks aren't just booted back to Europe, frankly.)
No, what got people excited this time, I believe, is that with some banks at such huge discounts to tangible book value, the buybacks may actually take on a great degree of meaning.
Let's take Citigroup (C) - Get Report , which is a holding in the Action Alerts PLUS portfolio. Citigroup has a tangible book value of $62.07 as of the last quarter. Citigroup has been the most scrutinized large capitalization bank in America, given its precarious state of existence at the height of the crisis.
It has had to issue a gigantic number of shares to raise capital and is now clearly overcapitalized. It has 2.94 billion shares outstanding. Before the crisis, it had 525 million shares outstanding.
Wednesday, when it got the green light to buy back $8.6 billion in shares, the company created an opportunity to close the gap between the tangible book value and the actual value. Every share it buys is additive, because it is basically buying $62 worth of stock at $43, which is gigantic. Now, if it could buy all of that stock back at $43 or below, then you should have a substantial increase in earnings regardless of net interest margin, which has been the holy grail of what these banks trade on.
That's a reduction of about 200 million of those 2.94 billion shares. It's not completely realistic when and how and at what speed Citi will buy back stock, but a super aggressive buyback could add as much as 80 cents a share to earnings, which would blow away the estimates and, theoretically make the stock go higher.
You don't get that kind of gain when you pay above book value, because you aren't buying for much less than cash, as you are with Citigroup, where the buyback is substantially additive.
Will analysts change numbers? I think that the big issue is: can Citigroup earn as much as it estimated to do? If it can, then it's hard to imagine a situation when the bank stays down here. Or, to put it another way, the average large capitalization bank trades at 10x earnings. This one trades at 8x earnings.
Given that it has a pretty similar profile to those other banks and that there's less legal liability and the hard-to-understand Citi Holdings, the so-called bad bank, will be gone, how is that discount explained?
Or, to put it another way, is Citigroup under Michael Corbat all that bad? I don't think so.
Bank of America has a less optimal situation, because it is buying back less stock; while its $15.50 tangible book value is still above its current price, the discount is much less and so, as a percentage of market capitalization, is the buyback. It has the PE that's two points higher than Citi, too. So the impact should be more limited.
Now, earnings are about to come out and as Doug Kass says elsewhere they could be paltry, making them good sales at the open today.
The one thing that makes me temper that negativity is that in a situation like Citi, the share buyback should make a real difference.
We will know soon enough, but there's a reason why Citi has said it will buy stock hand over fist here. In a low interest rate environment, it's the only way to create much of an impact on the share price.
It is, indeed, the one I think that represents the best value in a group that's perceived to have almost none and is regarded as a value trap.
Let's see what happens.
Action Alerts PLUS, which Cramer co-manages as a charitable trust, is long C.
, which Cramer co-manages as a charitable trust, is long KHC, PEP, WWAV and C.