

Who Wants Gum?

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C ount Wrigley among the famed consumer stocks that have stumbled in the past year. Shares of the world's dominant producer of chewing gum have fallen 24% this year, to around 68. Indeed, Wrigley has been a laggard in the current bull market, appreciating just 38% since the end of 1994 while the S&P 500 is up 178%. Over the long haul, however, the stock of the company officially known as William Wrigley Jr. has been a huge winner, rising 35-fold since 1980. And some investors argue that it could be once again, assuming the company is able to put its recent problems behind it.

The conservative, family-run firm has been hurt by some of the same factors as Gillette and Coca-Cola : difficult overseas markets and a stronger dollar. But the most troublesome situation for Wrigley is right here at home, where the growing popularity of high-intensity mints like Altoids has hurt Wrigley's domestic sales volume, which fell about 8% in the second quarter, one of its worst quarterly performances in a decade. And after five years of average annual earnings growth of 11%, analysts are now predicting earnings gains of just 4% this year, to $2.67 a share.

To counter the mint phenomenon, the Chicago-based company recently introduced Eclipse, a sharp-flavored pellet gum like Chiclets, formulated to "quickly eliminate strong mouth odors." But it remains to be seen whether Eclipse can reinvigorate Wrigley's sales, which are led by its familiar but aging brands, including Doublemint, Juicy Fruit and Spearmint.

Not everyone is wringing their hands over Wrigley's fate, however. "If you're a believer in the global wealth creation story, over a long period of time companies like Wrigley that make low-priced consumer goods should benefit," says Jeff Poppenhagen, manager of the Pioneer Growth fund, one of the Wrigley's largest institutional shareholders. "Wrigley's jewel is their global distribution. It takes decades to build that. You couldn't take away their worldwide gum leadership no matter how much money you spent." Superstar investor Warren Buffett is also an admirer of Wrigley, but Buffett's Berkshire Hathaway isn't a Wrigley holder.

Wrigley is widely deemed to have a superior franchise, but the knock against the company has been its high valuation. At its peak last year, it traded at 40 times profits. Now the shares fetch a more reasonable multiple of 25 times projected 1999 earnings. As the accompanying table shows, Wrigley trades at a higher P/E than other food companies, but that gap has narrowed in the past year.

The company's admirers compare Wrigley to Coke, citing its overseas strength. Thus, they say, it deserves a premium to such food stocks as Campbell Soup , Hershey Foods and Kellogg , which lack significant international operations. Wrigley, which long traded at a higher P/E than the S&P 500, now changes hands at exactly a market multiple based on projected 1999 earnings. At Wrigley's current price, Buffett might be tempted to buy the entire company given its digestable $8 billion market value -- especially given that some believe Wrigley's profits are understated. But it's unlikely the Wrigley family has any interest in selling, even to Buffett.

Wrigley, which generates nearly all its revenues from the gum business, now controls about half the global market, generating 60% of its sales and just under half of its profits outside North America. In the U.S., Wrigley has about 50% share, double that of Warner-Lambert , maker of Dentyne, Trident and Chiclets.

The company is even more dominant in Britain and Germany, where it has 80%-plus market share. Wrigley has expanded its strong European franchise eastward into Russia, where it opened a $70 million plant in St. Petersburg in May. The vast Russian market holds much long-term promise for Wrigley, but the country's economic turmoil has temporarily depressed sales, which fell an estimated 40% in the first quarter. Wrigley also does a booming business in China, where it uses bicycle-borne distributors in more remote areas of the country. The only major region of the world where Wrigley is weak is Latin America.

Low-profile Wrigley is a throwback to an earlier era of family-run enterprises. The company was founded in 1892 by William Wrigley Jr., who got his start giving away chewing gum to merchants to induce them to buy his soap and baking soda. And though publicly traded since 1919, the company has been under the control of the Wrigley family for four generations. The current chairman and chief executive, also named William Wrigley Jr., took over in March at the relatively tender age of 35, after the sudden death of his father, William Wrigley, who had run the company for 38 of his 66 years.

CEO Wrigley, known as Bill, oversees various family trusts that own about 30% of Wrigley's 116 million outstanding shares, giving the Wrigleys a stake worth around $2.5 billion. The family's voting control is much higher than 30% because the Wrigleys own more than half the company's super-voting class B stock.

Bill Wrigley declined to speak to Barron's for this article or make any executives available for an interview, continuing in the tradition of his workaholic, press-shy father, who rarely spoke publicly except at Wrigley's annual meetings. Wrigley has made no public comments about the business since he became CEO.

The company is famously uncommunicative with investors, as well. Fund manager Poppenhagen, whose firm owns over $100 million in Wrigley shares, asked to see Bill Wrigley and tour one of the company's high-security gum factories, but was turned down.

When Bill Wrigley took over, Wall Street predictably urged him to do something immediately to boost the lagging stock price. Wrigley has the wherewithal to take action because it has a pristine balance sheet with no debt, in contrast to virtually all food companies.

There were suggestions that Wrigley use its $400 million in cash and marketable securities, as well as its strong cash flow, to repurchase shares. Wrigley hasn't bought back an appreciable amount of stock since the 1980s.

There also were calls for Wrigley to raise the price of a pack of gum, which has stood at just 25 cents domestically since 1987, making it one of the cheapest consumer products.

Yet Bill Wrigley has indicated to Wall Street that there will be no attempt at quick fixes. "This is run a lot like a private company," says John McMillin, food analyst at Prudential Securities. "They can operate with a 10-year business plan, not a 10-month plan." Indeed, one of William Wrigley's tenets was to keep gum prices as low as possible and drive profit growth through higher sales volume.

For decades, this strategy worked beautifully, just as it did for Coca-Cola. This year, however, Wrigley's domestic volumes are expected to decline, continuing a trend, but overall company sales volume could be flat.

"This is a company that has spent a decade building its global infrastructure and expensing much of it along the way," Poppenhagen says. "This is an incredibly profitable company that could become obscenely profitable." He argues that as global economies recover, Wrigley's sales volume could increase 6%-7% a year and that annual earnings growth could hit the mid-teens. Despite its low-priced products, Wrigley earns pre-tax margins of 20%, tops in the food industry and not much below Coke's 27%.

What's more, Poppenhagen believes that Wrigley's conservative accounting effectively understates earnings. Wrigley, for instance, has avoided the restructuring charges that have become all too common at slow-growth food companies seeking to impress Wall Street. Until this year, Wrigley didn't have a stock options program for its executives, making it among the few big companies besides Berkshire Hathaway and Loews not to dilute its public shareholders with freebies for management.

The company's strong cash flow could rise even faster than earnings over the next few years as its currently sizable capital expenditures on new factories and distribution infrastructure decline. Wrigley has historically paid out half its profits to shareholders in dividends, via quarterly payouts and a special year-end distribution. The dividend has nearly tripled since 1989 and now provides a yield of close to 2%.

Wrigley's biggest challenge remains its mature U.S. franchise. "Wrigley has a problem. Altoids are hot, and gum is not," McMillin says. "Wrigley products are not things that my nine- and 12-year-old kids want to buy with their own money." McMillin says Wrigley should consider brand extensions like a "Juicy Fruit raspberry blast" gum to jazz up its staid domestic lineup and lure younger consumers.

Another problem for Wrigley is that many consumer-products companies are paying retailers so-called slotting fees to get prominent placement for their goods. But Wrigley, which spent nearly 15% of its $2 billion in revenues last year on advertising -- or two to three times what most food companies spend -- has long resisted making such payments. Retailers, it maintains, have an interest in putting Wrigley's gum near checkout aisles and in other desirable locations because of the product's ad-driven popularity.

"Part of Wrigley's problem is that they've lost counter space," McMillin says, noting that tobacco companies now spend heavily to lock up valuable placement. Because gum often is an impulse purchase, counter space is critical. Wrigley's North American volumes have been flat to down for the past few years.

Wrigley also must contend with a shrinking domestic market for sugar gums, where it has a 75% market share. In the growing sugar-free category, Wrigley's share is just 40%, although the company is hoping to expand its presence with Eclipse. That won't be easy. Wrigley is going head-to-head with the popular Dentyne Ice pellet gum, which was favored over Eclipse by several Barron's staffers in an informal taste test.

It's too early to tell whether Eclipse will succeed, but Wrigley is hoping to eventually sell $100 million a year, which would exceed any of its sugar brands, now led by Winterfresh and Doublemint.

Assuming the domestic situation can be righted, Wrigley's outlook is promising given its enviable international operations. And Bill Wrigley has been working fast to strengthen his management team, recently hiring a chief financial officer from Gillette and a senior vice president for international markets from Procter & Gamble. Says Poppenhagen: "This could be a great stock for the next 20 years."