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It was a ballooning item on Fannie Mae's FNMA -0.3225806451612903% Fannie Mae U.S.: OTC USD3.09 -0.01 -0.3225806451612903% /Date(1508797199000-0500)/ Volume (Delayed 15m) : 2811065 P/E Ratio N/A Market Cap 3590072728.91159 Dividend Yield N/A Rev. per Employee 15613000 More quote details and news » FNMA in Your Value Your Change Short position balance sheet called "deferred-tax assets" that was key in causing Barron's in early 2008 to state that the government-sponsored housing giant was busted and would have to be seized.

In a cover story entitled "Is Fannie Mae the Next Government Bailout?" (March 10, 2008), we reasoned that Fannie (trading over-the-counter with the ticker FNMA) couldn't really build net worth out of continuing huge losses and tax-loss carryforwards. The deferred-tax asset strategy was just accounting hocus-pocus, since the company was in no position to make a profit, given its parlous state.

Well, the seizure did occur that September, and one of the first things the government did was to write down some $62 billion in deferred-tax assets to zero. But now, after $116 billion of infusions by the U.S. Treasury, Fannie is again making money and announced last week that it might have to write up the value of this asset again, perhaps to its full value.

Enlarge Image Close Fannie Mae, the nationalized mortgage agency, is returning money to U.S. coffers—but don't play the stock. Getty Images

Of course, the asset won't tarry on Fannie's balance sheet for long. By virtue of Fannie being fully nationalized, the Treasury now routinely sweeps any profits made by the agency over to the benefit of the U.S. taxpayer. This would include balance-sheet gains like that on the deferred-tax asset.

In fact Fannie, having already paid the government $31.4 billion in dividends, could come close to defraying the $84.7 billion it still owes the American taxpayer with payment of the full $62 billion.

Strangely, last week's disclosure sent the common and nongovernment-owned preferred stocks of both Fannie and its mortgage sibling, Freddie Mac (FMCC), zooming. Fannie's common, which had been languishing for months around 25 cents a share, soared to a high of $1.47 Thursday before settling back near 80 cents.

Expectations of eventual value are likely to be cruelly dashed, however. Both Fannie and Freddie are destined to be severely downsized. If the two are privatized, as many predict, there's no reason why private capital would offer any sop to the erstwhile common and preferred shareholders. And should the government continue to operate the two with all their government privileges of low-cost capital and the like, it will insist on continuing to rake in all the profits.

After all, both Fannie and Freddie abused their privileged status in the past when they were shareholder-owned. They won't be given a second bite at the apple; that's bad news for the old owners.

-- Jonathan R. Laing

Rumor of a Pepsi Deal Refreshes Mondelez

There were unconfirmed rumors Friday that activist investor Nelson Peltz of Trian Partners had taken a stake in both Mondelez International MDLZ 0.04875670404680644% Mondelez International Inc. Cl A U.S.: Nasdaq USD41.04 0.02 0.04875670404680644% /Date(1508792400193-0500)/ Volume (Delayed 15m) : 5319753 AFTER HOURS USD41.03 -0.01 -0.024366471734892786% Volume (Delayed 15m) : P/E Ratio 36.08229294883067 Market Cap 61843394091.0217 Dividend Yield 2.1442495126705654% Rev. per Employee 284067 More quote details and news » MDLZ in Your Value Your Change Short position —the producer of Cadbury candy and Nabisco cookies—and PepsiCo, PEP 0.071678165038975% PepsiCo Inc. U.S.: NYSE USD111.69 0.08 0.071678165038975% /Date(1508792615691-0500)/ Volume (Delayed 15m) : 2223459 AFTER HOURS USD111.49 -0.2 -0.17906706061420002% Volume (Delayed 15m) : P/E Ratio 23.09887700866544 Market Cap 158725374885.341 Dividend Yield 2.8829796758886204% Rev. per Employee 240583 More quote details and news » PEP in Your Value Your Change Short position and was pushing for the latter to buy the former.

Mondelez (ticker: MDLZ), whose shares rose $1.17 to $29.73 on Friday, is appealing whether Pepsi (PEP) buys it or not. It is one of two companies formed from the Kraft Foods split last year. The other, Kraft Food Group (KRFT), holds the grocery business, including Jell-O, Oscar Mayer, and Maxwell House. Pepsi, with a market value of $121 billion, is more than twice the size of Mondelez.

Mondelez is up 7% since our bullish story ("How to Play the Kraft Spinoff," Oct. 1, 2012), but it has trailed new Kraft and many other food stocks amid mildly disappointing revenues and earnings. Mondelez trades for 19 times projected 2013 earnings of $1.57, but it looks more reasonable at 17 times projected 2014 profits of $1.76 a share.

The company has one of the group's best profit outlooks thanks to its focus on high-growth snacks, and its sizable exposure to the developing world. Mondelez aims for double-digit annual profit growth, above the mid to high single-digit gains targeted by many food companies.

Bill Pecoriello of Consumer Edge Research said in a recent client note that PepsiCo could pay $35 a share for Mondelez, or about 14 times trailing pre-tax cash flow. Mondelez is a superior company to Heinz, which fetched a multiple of 14 in its buyout by Berkshire Hathaway and Brazil's 3G. Pepsi rose $2.49 to $78.64 on Friday, despite its comment that it isn't interested in a major acquisition.

The Street likes the notion of a Mondelez deal, which could add $9 a share in value to Pepsi, writes Pecoriello. If the two companies do merge, Pepsi presumably would spin off its beverage business. An interesting issue is who would lead the new snack company: Pepsi chief Indra Nooyi or Mondelez boss Irene Rosenfeld.

The merger makes sense, but Mondelez looks appealing, deal or not.

-- Andrew Bary

Why Franklin Still Carries a Charge

Shares of Franklin Resources ben -1.1759485245174173% Franklin Resources Inc. U.S.: NYSE USD44.54 -0.53 -1.1759485245174173% /Date(1508792503265-0500)/ Volume (Delayed 15m) : 2563200 AFTER HOURS USD44.54 % Volume (Delayed 15m) : P/E Ratio 14.555555555555555 Market Cap 25135583393.6459 Dividend Yield 1.796138302649304% Rev. per Employee 709352 More quote details and news » ben in Your Value Your Change Short position are up 20% since Barron's took a favorable view of the big money-management outfit a year ago ("Franklin Is Right on the Money," April 2, 2012).

That's well ahead of the S&P 500's 11% gain and better than the stock performance of peers like T. Rowe Price Group TROW -0.7536650836258517% T. Rowe Price Group Inc. U.S.: Nasdaq USD96.13 -0.73 -0.7536650836258517% /Date(1508792400288-0500)/ Volume (Delayed 15m) : 1675609 AFTER HOURS USD96.13 % Volume (Delayed 15m) : P/E Ratio 16.517182130584192 Market Cap 23281076192.2351 Dividend Yield 2.3717882034744617% Rev. per Employee 720019 More quote details and news » TROW in Your Value Your Change Short position (TROW) and Invesco (IVZ). "The [fund] performance has been good, and flows have been good," says Jason Weyeneth, an analyst at Sterne, Agee & Leach, who has a Buy on the stock (BEN) with a 12-month price target of $163, about 10% above the current price.
 Prospects remain bright for the overseer of Franklin and Templeton funds, thanks partly to a well-rounded portfolio of bond, equity and hybrid funds that position the firm well for various types of economic environments. Another plus for Franklin is that it has a strong distribution footprint overseas, which accounts for 35% of sales, making it less reliant on the vagaries of the U.S. market.

The company, which manages about $814 billion of assets, trades at 14.4 times the $10.21 a share analysts expect it to earn this year—a discount to the group multiple of 16.

However, Bill Nygren, a portfolio manager of the Oakmark Fund, notes that it's important to back out the $25 a share of net cash and other investments on Franklin's balance sheet. That brings the P/E multiple down to a more compelling 12 times. "We think it's a bargain at that price," says Nygren, who gives the company plaudits for its capital-allocation moves, which include buying back shares.

-- Lawrence C. Strauss


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