Quaker Oats (OAT)
Jim: Don't buy
Jim: Quaker Oats is one of those companies that's a case study for the Harvard Business School, right Mike?
Mike: You mean in which the left hand didn't know what the right hand was doing?
Jim: Exactly. A few years ago Quaker Oats committed one of the greatest debacles in corporate history. Or so I'd argue.
Mike: Well, certainly a write-off of $1.4 billion is not chump change. Or maybe it is chump change.
Jim: Quaker Oats for a century has been one of the leading makers of oatmeal and other hot cereals, along with a few cold cereals such as Life and Cap'n Crunch. Then in the early '90s it bought Snapple, the eccentric beverage company, for an incredible $1.7 billion.
Mike: And then dribbled the juice all over the linoleum.
Jim: Quaker Oats completely botched the acquisition, took away a lot of the charm and appeal that had made Snapple a sort of cult favorite, fired that nice receptionist lady who had become the corporate spokesperson, and so on.
Mercifully, Quaker Oats finally threw in the towel in 1997, sold Snapple for something like only $300 million and had to write off the remaining $1.4 billion. And to the surprise of no one, it then fired the chief executive who oversaw the whole mess.
Mike: Now Quaker Oats is under new management and is on the rebound. This is mainly on the strength of Gatorade. Now, I don't know if this strikes you as odd, Jim, but did you know there's a whole category of products like that called "fitness water"?
Jim: To my chagrin, yes.
Mike: This reminds me a bit of when I used to go to my grandmother's house, where she used something called "toilet water" and of course to me, as a 6-year-old, "toilet water" meant only one thing, and I couldn't understand what she was doing slathering it all over herself. I didn't find out what that really was all about until I was 29.
Jim: Can we get back to fitness water?
Mike: Gatorade is a home run for Quaker Oats, even though it's a product everyone agrees looks like antifreeze, and to me, tastes like antifreeze.
Jim: An amazing 40% of Quaker Oats' sales and profit come from Gatorade. In fact, there's talk that if Gatorade keeps growing like it has, Quaker Oats might one day be considered mainly a beverage company.
Mike: So would you buy the stock?
Mike: Too bad, because I think Quaker Oats is a buy right now.
Mike: First it's pretty cheap. There's also a lot of growth potential in toilet water--excuse me, fitness water--and in extending what is a powerful brand in Gatorade. This company is under management that's obviously superior to the previous management.
Jim: That's not saying a lot, Mike.
Mike: Look, this is a stock that's selling for something in the area of 20 times this year's earnings, which is quite reasonable in this market.
Jim: Though that's at the high end of the food-stock sector, and I think this stock already has had its run. For much of last year the shares went nowhere and then they plunged early this year. They've caught some fire ever since March, as Gatorade kept powering Quaker Oats' earnings higher and the company started rolling out some new sports drinks and power bars.
Mike: So far I've heard only good things.
Jim: Didn't you hear the part about this stock already having its ride? It was selling in the mid-$40s in early March, and now it's in the high-$60s only a few weeks later.
Mike: But many expect this stock to climb well above $70, and I agree, meaning there's more than a 10% gain left in Quaker Oats.
Jim: I don't see it; this stock will be lucky to be a market performer for the next several months. Don't forget some other things: Quaker Oats is debt-heavy. I also don't believe that Gatorade can extend its past growth rate, even though this company spends millions every year on TV commercials and other promotions for Gatorade. Plus, don't expect Coca-Cola and PepsiCo to just sit there and let Quaker Oats keep holding this market mostly to itself.
Mike: No, think of it this way: With global warming on the way, people are going to spend a lot more money on fitness drinks.
Jim: Which reminds me of Quaker Oats' biggest competitive threat: It's called tap water, and it's free.
Mike: Except tap water is coming ever closer to tasting more like antifreeze than Gatorade.
Electronic Data Systems (EDS)
Jim: Don't buy
Mike: Don't buy
Jim: Here's another company with an interesting history.
Mike: No kidding. I mean, over the years Electronic Data Systems has been in more hands than Elian Gonzalez. And one of those owners was someone as unbalanced as some of those relatives in Miami.
Jim: You refer, of course, to H. Ross Perot, who started EDS in 1962 and built his fortune with the company.
Mike: But from there matters went from the sublime to the ridiculous. EDS ended up in the hands of General Motors, which proceeded to make a dog's breakfast out of the company.