Tyson Foods Outbids Pilgrim’s Pride for Hillshire Brands (TSN, HSH)

The Arkansas-based food producer Tyson Foods (TSN) made an offer to acquire Hillshire Brands Co. (HSH), the company known for its Jimmy Dean and Hillshire sausage brands, on Thursday.

Tyson Foods offered to buy Hillshire in a deal valued at $6.8 billion, a bid that tops that of Pilgrim’s Pride, a chicken producer, which had offered $6.4 billion for the same acquisition earlier this week. Tyson’s bid showcases the company’s efforts in expanding its supermarket food offerings. While both Pilgrim and Tyson’s bids are all-cash and assume Hillshire’s debt, Tyson’s is undeniably more aggressive; the company’s bid is nearly 18% higher than that of Pilgrim’s, valuing Hillshire at about $50 a share compared to the earlier offer, which equates to about $45 per share.

News of the Tyson bid sent shares of Hillshire soaring nearly 18% on the day, or up $7.94, settling at $52.76 a share as the closing bell rang. Shares of Tyson Foods also rallied higher on Thursday, gaining $2.50, or 6.13%. From a year-to-date perspective, Hillshire and Tyson shares are up 57% and 29%, respectively.

Economy Wilts, Fed Tapers, Market Climbs

The U.S. economy grew, sort of, at a miniscule annual rate of 0.1 percent in the first quarter, according to the Commerce Dept. This preliminary reading, the first of three, was far below pessimistic expectations. This underperformance has occurred several times since the on-again, off-again recovery officially began in June 2009.

No wonder U.S. government bond yields have declined this year, contrary to most expectations, with the 10-year Treasury going from 3 percent to as low as 2.6 percent.

The first quarter’s economic weakness was attributed primarily to a 7.6 percent decline in exports, partly because of economic weakness in Europe and Asia. Poor weather, a favorite excuse for everything that went wrong during the winter, probably played a part in the export slump.

Also noteworthy, however: Business spending on equipment fell at a 5.5 percent annual pace in the first three months of the year, the largest decline since 2009.

Regardless of the causes, the tepid (to be generous) GDP reading marks a continuation of the still-sluggish growth in the current five-year economic expansion.

The report came right before the Federal Reserve announced that it is continuing to reduce, or taper, its bond purchases to $45 billion a month, from the original $85 billion. The Fed says it’s starting to see faster growth after the harsh winter.

The Fed also maintained its guidance on short-term interest rates, saying they would remain near zero for a “considerable time” after the bond-buying program ends later this year. The current expectation is that the Fed won’t start to raise interest rates until well into 2015.

However, evidence of a possible economic rebound came the next day, May 2. The federal government's jobs report for April showed a jump of 288,000, with a sharp decline in the official unemployment rate to 6.3 percent.

Meanwhile, corpor! ate profits continue to grow, albeit modestly. Earnings for the first quarter have been better than minimal expectations. They’ve helped to support the broad stock market during its turmoil when various high-flying stocks came back to earth.

As of now, the pop of the speculative bubble hasn’t spread significantly into the broad market. The Standard & Poor’s 500 ended April only slightly below its all-time closing high. The benchmark is up 1.9 percent this year. Some might be disappointed after 2013′s 30 percent rise. But we view it as part of a desirable consolidation period after a big advance that started in 2012.

Also this week, the Dow Jones Industrial Average, which has been the laggard among the major stock-market indices, finally caught up with the others, which hit new all-time highs earlier this year. The Dow closed in record territory for the first time in 2014.

The Dow has trailed this year mostly because of how its 30-stock index is calculated. The S&P 500 is weighted by the market capitalization of its 500 components. In sharp contrast, the Dow is a price-weighted index. So the stocks with the highest share price have the greatest weight.

While this may have been appropriate in the Dow’s early days, it makes no sense now. In other words, the Dow is increasingly disconnected from the broad market. But here’s the additional, bigger twist to the story:

In September 2013, as part of its periodic housecleaning, the Dow decision-makers dropped three stocks from the DJIA. All were depressed, low-priced issues: Alcoa (NYSE: A), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ). Together, they then accounted for only 3 percent of the total DJIA average.

Two of the additions were Visa (NYSE: V) and Goldman Sachs (NYSE: GS), which then assumed second and third places in price, after International Business Machines (NYSE: IBM). The third addition was the relatively high-priced Nike (NYSE: NKE). So all three ! new compo! nents together got a disproportionate influence in the Dow, particularly compared with the trio they replaced.

The Dow’s selection committee has been frequently criticized in the past for “buying high and selling low.” That characterization looks increasingly accurate. In the first four months of 2014, these were the three biggest Dow losers: Goldman Sachs, down 10 percent; Visa, off 9 percent; and Nike, a 7 percent decline.

The Dow is easy to follow. But it’s becoming increasingly irrelevant.

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Turning Gray to Green

The American long-term care industry has been growing rapidly and will continue doing so for years to come. According to a study from the US Department of Health and Human Services, more than 70 percent of Americans over the age of 65 will need long-term care services at some point in their lives. Anyone over the age of 65 has a 40 percent chance of entering a nursing home and about 20 percent of them will remain there for at least five years.

The size of the 65 and older population jumped by more than 15 percent between 2000 and 2010, compared to just 9.7 percent growth in the population as a whole. That group now makes up about 13 percent of the total population and is forecast to account for more than 16 percent by the end of this decade and 20.2 percent by 2050.

Those trends have spurred huge runs for real estate investment trusts (REIT) that operate assisted-living facilities, rehabilitation centers and nursing homes across the country. While the senior living REITs have been an extremely profitable play on America's graying population, their tide is ebbing with the prospect of rising interest rates creating fears that their profitability will be dinged. That creates opportunities for value investors focused on long-term returns, but it means short-term volatility.

In this context, one compelling investment now is Omnicare (NYSE: OCR), a company that provides pharmacy services to long-term care and other medical facilities. Omnicare receives prescription orders from physicians at facilities, reviews them for effectiveness and any potential interactions with other drugs the patient is receiving and then prepares the drugs in specialized individual packages for easy administration.

Omnicare has consultant pharmacists who can regularly review patient charts for potential interactions and duplications or to recommend alternative drugs or formulations that can increase the effectiveness of a! patient's medications, while also potentially reducing costs. It also has specially-trained nurses available who can administer infusion medications if needed by facilities.

The company also has a specialty care group that provides medication dispensary and management services for patients of all ages suffering from rare or unusual conditions that require specialized medications not commonly found on pharmacy shelves.

Omnicare has only recently started to gain favor with investors with its shares gaining ground over the past 12 months or so. In years past, the company was known for a growth strategy driven by acquisitions, piling up debt and creating uncertainty for investors.

However, under chief executive officer John Workman, who recently announced that he plans to retire, the company did an about face and began focusing on organic growth, streamlining operations and returning more capital to shareholders.

With Workman at the helm, the company experienced three consecutive quarters of net bed growth (a measure of patients served), a 30 percent increase in revenue from the specialty care group and an almost doubling of the company's dividend. More than $500 million worth of company shares have also been repurchased over his time as CEO. Needless to say, the market has been thrilled with his performance and over the course of his tenure the company's shares have gained just more than 58 percent in value.

But since the company announced its full-year results on February 19, its share price has declined by 8.3 percent. The company posted an earnings per share (EPS) loss of $0.43 for 2013 versus a gain of $1.78 in 2012. That loss came despite the fact that net sales grew from $5.88 billion in 2012 to $6.01 billion in 2013, with gross profit up from $1.4 billion to $1.42 billion.

One of the main culprits for the loss were discontinued operations, as the company ended its hospice pharmacy services and some of its retail operations under the specialty care grou! p over th! e course of the year, nicking $128 million from cash flow. The company also purchased $101 million in inventory in the final quarter of the year, taking its full year purchases to a total of $138 million due to restocking to accommodate expected future growth and to take advantage of favorable pricing.

Omnicare also paid down $214 million in debt last year while restructuring its remaining maturities, spreading them more evenly over the next 20 years to take advantage of favorable rates and reduce refinancing risk. No new debt was issued over the course of 2013. It also repurchased $221 million worth of shares while paying a total of $63 million in dividends.

Workman opted to take the bulk of the pain related to changing the company's growth strategy this year rather than dragging it out. As a result, his successor Nitin Sahney will essentially be getting a clean slate. Previously serving as the company’s president and chief operating officer, Sahney is expected to continue Workman's same program of focusing on organic growth.

For 2014, net sales are expected to grow by more than 5 percent to between $6.3 billion and $6.4 billion, while adjusted cash EPS from continuing operations are expected to jump from $3.43 to between $3.64 and $3.72.

With favorable demographics, a more sustainable growth strategy and a positive pricing outlook thanks to drug patent expirations, the company should turn in solid growth in 2014.

This is an excellent opportunity to pick up shares of Omnicare under 63.

Extended Warranties for Your Gadgets: Worth the Money or Not?

Getty Images Holiday shopping season is in full swing, and smartphones, tablets, and other electronic devices once again top many shoppers' gift lists. Given how expensive many popular gadgets have become, one big question many shoppers are facing is whether or not to tack on an extended warranty to protect themselves should their electronic devices come to harm. They're Lining Up to Sell You Protection Retailers know that the best time to get you to pay to protect expensive items is while you are making a big-ticket purchase. For years, Best Buy (BBY), Sears (SHLD), Walmart (WMT), and other major retailers have sold extended warranty protection on high-priced electronics like computers and TVs. That coverage can be pricey, with Walmart having recently charged $65 for a two-year TV service plan and Best Buy offering two-year coverage on an $800 TV for $99.99 and five-year coverage for $179.99 . Appliance warranties can also be expensive, with Sears recently charging $280 for a three-year protection plan on a $950 refrigerator. Protection plans for smartphones and tablets are also popular. Apple (AAPL) offers its AppleCare for its devices. Coverage to extend an iPhone's warranty and other protections for two years will run you $99. Other companies have sought to offer more comprehensive coverage for electronic devices, with Protect Your Bubble offering phone and tablet insurance for $7.99 to $9.99 a month that covers not only mechanical problems but also common mishaps like damage from drops and liquid spills, as well as theft or loss. Many Items Have Built-In Protection What many consumers don't realize is how much protection against common problems they already have, even without buying extra. Nearly every purchase comes with at least limited warranty protection for mechanical defects. According to Consumer Reports, most issues that would qualify for coverage under extended warranties tend to happen during the initial warranty period, making the extended coverage essentially worthless. Moreover, many customers who use credit cards to purchase items get the benefit of extended coverage from the companies behind their plastic. For instance, MasterCard (MA) automatically doubles whatever manufacturer warranty a product offers, and provides 90-day insurance coverage even against theft or accidental damage on many purchases. Visa (V) offers similar coverage on certain types of cards it offers. On the other hand, even high-priced protection won't cover every loss. Some liquid-damage coverage won't cover you if you drop your smartphone in a swimming pool, for instance. Moreover, with certain policies, if a loss happens right after you sign up for coverage, you'll find that the protection doesn't begin until after an initial period. The other key thing to consider with gadget insurance is the fact that if a loss occurs, you might end up having to foot a big part of the bill. For instance, Protect Your Bubble charges deductibles of $75 for basic mobile phones, tablets, and laptops under $1,000, with that deductible rising to $100 for items above $1,000. Apple iPhones get a higher deductible of $120. When you factor in monthly insurance premiums, that means you could end up spending $300 or more if you actually need to make a claim -- $300 that could otherwise have gone a long way toward replacing a device even in the unlikely event of loss. Similarly, Apple charges a $79 service fee for accidental-damage repairs on top of the initial cost of coverage. Be a Smart Shopper Protecting yourself against bad luck might seem like a smart move with a pricey electronic gadget. But for most people, gadget insurance will end up being a money-waster far more often than it proves to be a money-saver.