Wrigley: Solid Growth, by Gum
The confectioner has many old-time business virtues and a growing market. Its high price, though, may be too much to swallow
Listening to William Wrigley Jr., the fourth-generation president of Wrigley Co. (WWY
), talk about corporate strategy, it's as if you've taken a trip back in time. The chewing gum and confectionary company, based in Chicago, is something of a corporate anachronism in the Information Age economy. It has no debt. Management doesn't speak in terms of "pro forma earnings." And the president, who is 39, speaks to investors with an old-fashioned message.
At the annual meeting Mar. 11, Wrigley Jr. told shareholders: "A core value of our company is its willingness to take measured risks. John F. Kennedy once said, 'There are risks and costs to any program of action, but they are far less than the long-range risks and costs of comfortable inaction.'"
The downside -- and you knew there had to be a catch -- is that too many investors already know about Wrigley's ability to consistently produce record sales and profit growth, and its commitment to developing new products using tried-and-true methods. In the 2003 BW50 list of top-performing companies, Wrigley climbed to the 46th spot, from 134th last year.
TOBACCO WITHOUT TEARS. Wrigley's stock isn't cheap. It's trading around $55 a share as of Mar. 21, up 25% from a July, 2002 low. It has a price-earnings ratio of 30, compared to 19 for an index of Wrigley's peers. "We would love to own Wrigley," says Val Jensen, chairman of Jensen Investment Management and co-portfolio manager of the Jensen Portfolio. "Wrigley has so many of the attributes we're looking for. The problem is, the stock has become too expensive. If it fell back to the mid-40s, I think it would become interesting again."
Even as a pricey stock, though, the risk in Wrigley isn't all that high. It expects to nearly double its sales to $5 billion by 2006 -- and that's likely, with major overseas markets such as China and Russia exhibiting high demand for Wrigley's chewing gum. Moreover, Wrigley has a track record of meeting or beating analysts' earnings targets. Its management has a reputation for being conservative. After all, it's unlikely that Wrigley Jr. and his team would do anything to upset the good relations they've developed with thousands of long-time shareholders.
Wrigley is like a tobacco company without the risk, liability, or ethical dilemma of selling something deadly. "Most consumer-products companies have had little or no sales growth recently," notes Bank of America securities analyst William Leach -- citing the sluggish performance at Kraft, Procter & Gamble (PG
), Coca-Cola (KO
), and Heinz (HNZ
). "These companies have been squeezed by a more demanding retail trade business and higher-quality private-label brands," he says. Heinz, for example, has had more than 20 earnings write-offs over the last 25 quarters.
CHOCOLATE CRAVINGS. Wrigley has a history of tremendous success expanding overseas and also introducing new products at home. Take pellet-shaped chewing gum. Sold under the Orbitz and Eclipse brand names, it retails for more than $1.25 per pack. "That's a very high-margin product," Leach says. "While most of the food industry has gross margins of about 40%, Wrigley's overall gross margins are 65%." The result has been industry-leading profit growth. In 2002, earnings increased 10.7%, to $402 million, or $1.78 a share, on revenues of $2.75 billion, a 14% increase.
One caveat for investors is that many experts believe Wrigley's strong balance sheet gives it ample currency to seek acquisitions. One name mentioned often is Tootsie Roll Industries (TR
), says Leach. And Wrigley is still fond of Hershey (HSY
), management acknowledges, despite the failed bid to acquire the legendary chocolate maker in 2002.
Wrigley Jr. says he has no comment on other companies he's eyeing and what new products Wrigley may introduce. "We will keep our eyes and ears open," he says. However, "in today's competitive environment, spelling out the details in advance just doesn't make any sense." Over the long haul, a smart acquisition would add value, but in the short term, it might put downward pressure on the stock.
CHEWED UP. Wrigley Jr. has another old-fashioned virtue: He's willing to admit when the company has made a mistake. So now, he's pulling Surpass antacid chewing gum off the market after just two years.
Otherwise, Wrigley continues to tout the benefits of its affordable and harmless consumer product. On its corporate Web site, a note from management that attempts to explain why the company is doing so well amid a weak economy, fears of terrorism, and the war with Iraq: "Scientific studies [show that] chewing reduces muscular tension and helps people feel more at ease."
Wrigley's message: The world may be a more dangerous place, but Wrigley's gum and its stock are safe bets. Yet given the number of investors who've flocked to it already, this investment isn't quite as sweet as it could be.
MARCH 24, 2003
Shook is a writer for BusinessWeek Online in New York Edited By Beth Belton
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