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What I Learned From a 5-Cent Box

By Dan Ferris, editor, Extreme Value
Saturday, December 15, 2007

The "effect" is unmistakable.

Here's an example. In the 1990s, most deodorants came packaged in cardboard. Whether spray, roll-on, or solids, they always had a cardboard box around them.

You took the deodorant home, ripped off the cardboard, and threw it in the trash. As it turned out, you were throwing five cents in the trash, a necessary part of the cost of not wanting to smell bad.

But some people thought about this and realized it wasn't necessary at all. They looked at that five cents and saw only waste. So they went to the makers of deodorant and asked them to stop using the cardboard boxes.

And the deodorant makers stopped.

It was certainly in the deodorant companies' best interest to do so. They kept a couple pennies of the savings, and passed the rest onto the retailers, who in turn passed most of it on to people who buy deodorant. Hundreds of millions of dollars have been saved since the deodorant box disappeared.

Go into CVS, Rite-Aid, Target, Walgreens, Albertson's, Kmart... anywhere deodorant is sold, and you'll see the same thing. No cardboard boxes. I don't believe a word of the fearmongering for which Al Gore won a Nobel Peace Prize. But waste is waste, and, as one source put it, "Millions of trees were not cut down, acres of cardboard were not manufactured only to be discarded, one billion deodorant boxes didn't end up in landfills each year. It's all unseen, all unnoticed and all good."

The company that convinced the deodorant makers to stop using cardboard boxes sells well over 100,000 separate products in its largest stores. For many of those products, the same drama has played out in one form or another.

The company I'm talking about here may be obvious to you. During the last four quarters, it has earned $20 billion of income before taxes, all of it by attracting customers who want to save a few pennies on items they use every day. The 15 most frequently purchased items from its 7,000-plus stores worldwide all sell for less than $3.

Everyday, for thousands of products, this company is doing what it did with deodorant. Most times, the supplier keeps a little, the company takes still less, and finally, and most importantly, the customer gets the lion's share of the savings.

Read that last sentence again. That is far and away the No. 1 reason I think Wal-Mart is a fantastic company.

With the exception of Costco, Wal-Mart has mastered cost-cutting – and passing savings on to customers – better than any of its competitors.

You can't count on a lot in the world. But you can count on finding goods you need at low prices every single day of the year at any Wal-Mart store anywhere in the world. That's remarkable. Wal-Mart's cache rivals Coke, Marlboro, or any other brand you can name. By being the most widely recognized low-cost retailer in the world, Wal-Mart has built a great brand name for itself.

Not only does Wal-Mart save you money on the goods you buy from it. Its sheer size and influence in the national and global marketplace even affect businesses that refuse to sell their products in its stores. Snapper lawnmowers, for example, were once sold in Wal-Mart stores. Not anymore. Snapper sold 20% of its products through Wal-Mart. It realized that it was undercutting the independent dealers that accounted for the other 80% of its business. Snapper couldn't afford to have 20% of its business jeopardize the other 80%, so it said adios to Wal-Mart.

But Snapper still feels the presence of Wal-Mart, each and every day. It still has to keep an eye on the difference between Wal-Mart's inexpensive mowers and its higher-priced mowers. Even though Snapper mowers are universally accepted as a high-quality product, the spread over Wal-Mart mowers can't get too big, or Snapper will price itself completely out of the market. Wal-Mart's presence exerts a kind of discipline over companies that make consumer products, and the retailers who sell them. For many products you use from day to day, it's very difficult to get you to pay too much, whether there's a Wal-Mart store nearby or not, simply because Wal-Mart exists.

The same phenomenon has occurred in the personal computer market, because of Dell's direct sales model, which delivers a quality product at a lower price. In the airline industry, the low-cost provider – the one that's most consistently profitable – is Southwest. These companies are the Wal-Marts of their industries. They set the bar for customer expectations, especially when it comes to price. They don't sell 100,000 different products that we use every day. Wal-Mart does sell us all those products, so it has a wider influence on other businesses.

Wal-Mart's share price is around $48 today, more than 30% below its 1999 all-time high, a nontrend if ever there was one. But sales per share have more than tripled since then. The dividend has risen nearly fivefold. Cash flow per share is more than two and a half times its 1999 level. Profits per share are up more than 140%. The company is obviously much more valuable, and yet it's selling for 30% less.

If it's "trends" you seek, and you're smart enough to look for them in the right place, I challenge you to find a more consistent trend to follow than Wal-Mart's sales, profits and steady returns. You'd be hard pressed to find a company with a better long-term outlook at a better price.

If you can't tell by now, I'm a fan of Wal-Mart as an investment. As any rich investor can tell you, when a company run as efficiently as Wal-Mart is purchased at the right price, the long-term capital gains beat any other form of common stock investment.

Good investing,

Dan Ferris

Market Notes


Depending on whom you talk to, global warming is either a worldwide catastrophe or one of the great pseudo-scientific frauds of all time.

Our mission in DailyWealth isn't to debate these kinds of things... we're just trying to help readers find great investments. And boy is money being made by listening to what the market thinks of investments in "green energy."

The market isn't concerned with any of our beliefs on clean energy vs. dirty energy. The market does what it wants regardless of what an individual thinks. As you can see from our chart of the week, the market is "doing" a bull market in biodiesel, windmills, solar cells, and hydropower.

Our chart is the PowerShares Clean Energy Fund, an ETF containing a who's who of Earth-friendly energy companies. With a 45% gain so far this year, this fund's gains are head and shoulders above nearly every other sector-specific ETF in the world. Simply put, billions are flowing into this sector from all directions.

This is the trend of high oil prices, increased environmentalism, and Asia's voracious energy consumption... and as you can see, this trend is clearly "up."

– Brian Hunt

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