Shares of Deere advance following plant expansion announcements
MOLINE, Ill. (AP) -- Shares of Deere & Co. rose 4.5 percent Thursday following two announcements by the agricultural equipment maker that it will invest nearly $180 million to expand plants in the United States and Brazil.
Deere, citing rising global demand for its tractors and other farm machinery, said it will invest $97 million to expand high-horsepower tractor manufacturing capacity by about 40 percent at its plant in Waterloo, Iowa.
And Deere plans to invest about $80 million in agricultural manufacturing and parts distribution operations in Brazil. The increased spending is intended to boost manufacturing capacity for tractors and combines and improve service to customers.
Friday, August 29, 2008
Wednesday, August 27, 2008
Ag Giants Go Wild Over Next-Generation Ethanol
While the food vs. fuel debate rages on, I think most of us can agree that using corn crop residue to produce bioenergy is a pretty palatable option.
This tasty target is the subject of a new powerhouse partnership between Big Ag aces Monsanto (NYSE: MON), Deere (NYSE: DE), and Archer Daniels Midland (NYSE: ADM). The trio's objective is to figure out the best way to harvest, store, and transport corn stover -- the stalks and leaves left in the field after harvest.
When I saw the press release issued by ADM -- the biggest bioenergy bull of the lot -- my first thought was that Monsanto would be crafting some enzyme that would pave a path for the trio toward cellulosic ethanol production. But Monsanto does seeds, not superbugs. No, the MonDeLand monster just needs to get the biomass from the field to the facility. Someone else can figure out how best to gasify or ferment it.
Compared to some bioenergy initiatives, this is a seemingly modest undertaking. Folks like DuPont (NYSE: DD), BP (NYSE: BP), and General Motors (NYSE: GM) have each launched joint ventures seeking to commercialize next-generation ethanol technologies. Ethanol leader Poet LLC is also moving quickly toward corn cob-ethanol pilot production.
The corn-waste approach is actually quite appealing. I don't know who will become the cellulosic champ, but insofar as so-called corn stover proves to be a viable next-generation feedstock, the trio will take a cut of the action.
This tasty target is the subject of a new powerhouse partnership between Big Ag aces Monsanto (NYSE: MON), Deere (NYSE: DE), and Archer Daniels Midland (NYSE: ADM). The trio's objective is to figure out the best way to harvest, store, and transport corn stover -- the stalks and leaves left in the field after harvest.
When I saw the press release issued by ADM -- the biggest bioenergy bull of the lot -- my first thought was that Monsanto would be crafting some enzyme that would pave a path for the trio toward cellulosic ethanol production. But Monsanto does seeds, not superbugs. No, the MonDeLand monster just needs to get the biomass from the field to the facility. Someone else can figure out how best to gasify or ferment it.
Compared to some bioenergy initiatives, this is a seemingly modest undertaking. Folks like DuPont (NYSE: DD), BP (NYSE: BP), and General Motors (NYSE: GM) have each launched joint ventures seeking to commercialize next-generation ethanol technologies. Ethanol leader Poet LLC is also moving quickly toward corn cob-ethanol pilot production.
The corn-waste approach is actually quite appealing. I don't know who will become the cellulosic champ, but insofar as so-called corn stover proves to be a viable next-generation feedstock, the trio will take a cut of the action.
DuPont Relying on Ag Business
Non-G7 markets, agricultural chemicals and a focus on key customers and new products will drive growth for DuPont Co. (NYSE: DD - News). Strong performance in the agricultural products market, emerging markets, pricing actions, favorable currency and productivity is likely to outweigh increasing costs as well as weak auto and housing markets. The company is focusing on nearly doubling its earnings growth rate.
However, slowing demand in U.S. markets is likely to offset growth in the agriculture market. DD expects second half 2008 earnings per share to be lower than the last year due to higher energy and ingredient costs, lower demand in developed markets, lower income from asset sales and a higher effective tax rate. This compels us to rate the stock a Hold with a target of $41.50.
Due to an exceptionally strong North American agriculture market, Pioneer Hi-Bred, DuPont's advanced plant genetics business is poised for large revenue gains. DuPont expects to achieve at least 30% North American seed corn market share in 2008 and to grow this share in the future years.
Pioneer will increase its seed production acreage by 58% in 2008 to meet increased demand for its canola hybrids. The company plans to double its capacity by 2008. Pioneer has already been gaining share in non-U.S. markets due to the strength of its base germ plasma.
On August 15, DuPont raised prices for all of its Ti-Pure titanium dioxide grades sold in Latin America, Western and Central Europe, Turkey, Greece and North Africa. The company increased the product prices in Latin America by $150 per metric ton.
However, slowing demand in U.S. markets is likely to offset growth in the agriculture market. DD expects second half 2008 earnings per share to be lower than the last year due to higher energy and ingredient costs, lower demand in developed markets, lower income from asset sales and a higher effective tax rate. This compels us to rate the stock a Hold with a target of $41.50.
Due to an exceptionally strong North American agriculture market, Pioneer Hi-Bred, DuPont's advanced plant genetics business is poised for large revenue gains. DuPont expects to achieve at least 30% North American seed corn market share in 2008 and to grow this share in the future years.
Pioneer will increase its seed production acreage by 58% in 2008 to meet increased demand for its canola hybrids. The company plans to double its capacity by 2008. Pioneer has already been gaining share in non-U.S. markets due to the strength of its base germ plasma.
On August 15, DuPont raised prices for all of its Ti-Pure titanium dioxide grades sold in Latin America, Western and Central Europe, Turkey, Greece and North Africa. The company increased the product prices in Latin America by $150 per metric ton.
What's Going on with Corn?
Just last week, our own Brad Zigler was talking about the ethanol bust; in particular, how the boom in corn prices (and inflation) had made being an ethanol refiner a pretty dismal proposition, and highlighting how the push-me-pull-you of inflation was hitting corn prices.
Good points, but I'm a simple guy. I like to stick to the things I can point to with some real assurance. That's part of what's so great about commodities investing - you're making bets on stuff, not just opinions and potential.
So when I see the kind of action we've seen in corn this summer, I am inclined to think there's something going on that's a bit more than just investor sentiment. Here's how it's gone lately:
So let's recap: This summer we had a huge run-up to $7.50/bushel in corn based almost entirely on a theoretical supply shock. Iowa briefly became a destination for boaters as millions of acres went under water from floods. The headlines at the time (in June) were predictably hyperbolic, prices spiked as traders bet against the character and ingenuity of Iowa farmers, and then, as Don Bousquet covered in July, the USDA dropped a surprise on the markets: Those crafty farmers had actually sewn a million or so more acres than previously thought. Supply shock over, the market then turned to the demand side, and saw the effect of the Corn Crush Squeeze that Brad highlighted last week.
And so, late summer has been a strictly "look out below" affair. Until last week, when corn started gobbling back pennies 25 at a time. So, why the pop?
First off, corn is at a critical point. The meme du jour is that ethanol's a bust, so that's bad for corn bulls. And weather is showing even more mixed signals now. July's good news for buyers - that the crops were just fine - was supported by the mid-August crop report from the USDA, which suggested farmers would be harvesting 79.3 million acres, pretty much in line with most analysts' expectations.
You'd expect that all this would continue corn's decline, so why the pop? One interesting theory is that speculators, having either been burned by staying in corn for too long, or being fat and happy on their realized gains, are out of the mix. That would imply a bit more stability in prices than we've seen this summer and a return to somewhat more rational-looking trading sessions that we saw in 2007. That's likely a win-win both for commodity producers and consumers long term.
But if you believe this theory, then supply and demand become even more fundamental drivers for immediate prices. One of the bigger surprises (at least to me) about the price spike was how elastic demand seemed to be. It turns out that cattlemen were more than willing to either slaughter earlier or just feed their cows something other than corn, like peas and barley: After all, cows are designed to live on grass in the first place, and corn was only introduced into the bovine diet as a matter of cost and convenience. With corn prices coming down, it's essentially the matter of a phone call for a feedlot to switch back from a substitute feed to corn.
All that speaks for a bit of stability, and a natural floor in corn prices, which is what we're seeing play out in recent sessions. It's quite possible that for many actual end users of corn - feedlots, ethanol plants - $5.00/bushel is a psychological trigger point; a price at which they say "OK, we're back in business" and they can survive the corn crush and feed all those pigs and cows.
Sometimes I just can't help myself; this chart had to be drawn. It's way too early to call this any kind of a new bottom - it hasn't been tested in any meaningful way. But what is clear is that the hyperbolic trend has been broken, and pretty dramatically. I'm not a voodoo chartist, but sometimes a few lines help make an obvious point. (A "real" chartist would talk about how this could be an emerging head-and-shoulders pattern, the beginnings of a pennant formation or look to that central black trend line as the new potential point of resistance. And they'd have a long litany of reasons, too.)
This is all just (pardon the pun) speculation. But this basic question of what kind of money is in the market is crucial to understanding market dynamics. Speculators, in an abstract sense, are critical to making the futures market work. But that's speculator with a capital S - the consistent market participant. That's not necessarily the same as bandwagon jumpers who hopped on the commodities train and have now moved on to greener pastures, and at least some people claim to have evidence that that's just what's going on.
The bottom line is this: Eventually, supply and demand rule the market. No matter how many tulip-chasers enter the market, at some point there are only so many tulips and so many gardens out there. Or to torture the metaphor a bit less, there are only so many acres that can grow corn, and only so many cars and cows that can eat it. Neither supply nor demand is truly infinite, but nothing has changed in the long-term fundamentals here: There are more uses and users of corn than ever, and with both plantings and yields already at record levels, supply seems less elastic than demand. In fact, the USDA long-term projections suggest near-zero growth in planted acreage of corn over the next 10 years.
And this moderate increase in planted area, supported by increases in yield, would just about keep things in balance with the 10-year demand projections:
The implication is that we're zeroing in on a new equilibrium price for corn (and most other agricultural commodities). My guess is that for corn, it's going to keep a moving average much closer to $5.00/bushel than the historic $2-and-change.
Good points, but I'm a simple guy. I like to stick to the things I can point to with some real assurance. That's part of what's so great about commodities investing - you're making bets on stuff, not just opinions and potential.
So when I see the kind of action we've seen in corn this summer, I am inclined to think there's something going on that's a bit more than just investor sentiment. Here's how it's gone lately:
So let's recap: This summer we had a huge run-up to $7.50/bushel in corn based almost entirely on a theoretical supply shock. Iowa briefly became a destination for boaters as millions of acres went under water from floods. The headlines at the time (in June) were predictably hyperbolic, prices spiked as traders bet against the character and ingenuity of Iowa farmers, and then, as Don Bousquet covered in July, the USDA dropped a surprise on the markets: Those crafty farmers had actually sewn a million or so more acres than previously thought. Supply shock over, the market then turned to the demand side, and saw the effect of the Corn Crush Squeeze that Brad highlighted last week.
And so, late summer has been a strictly "look out below" affair. Until last week, when corn started gobbling back pennies 25 at a time. So, why the pop?
First off, corn is at a critical point. The meme du jour is that ethanol's a bust, so that's bad for corn bulls. And weather is showing even more mixed signals now. July's good news for buyers - that the crops were just fine - was supported by the mid-August crop report from the USDA, which suggested farmers would be harvesting 79.3 million acres, pretty much in line with most analysts' expectations.
You'd expect that all this would continue corn's decline, so why the pop? One interesting theory is that speculators, having either been burned by staying in corn for too long, or being fat and happy on their realized gains, are out of the mix. That would imply a bit more stability in prices than we've seen this summer and a return to somewhat more rational-looking trading sessions that we saw in 2007. That's likely a win-win both for commodity producers and consumers long term.
But if you believe this theory, then supply and demand become even more fundamental drivers for immediate prices. One of the bigger surprises (at least to me) about the price spike was how elastic demand seemed to be. It turns out that cattlemen were more than willing to either slaughter earlier or just feed their cows something other than corn, like peas and barley: After all, cows are designed to live on grass in the first place, and corn was only introduced into the bovine diet as a matter of cost and convenience. With corn prices coming down, it's essentially the matter of a phone call for a feedlot to switch back from a substitute feed to corn.
All that speaks for a bit of stability, and a natural floor in corn prices, which is what we're seeing play out in recent sessions. It's quite possible that for many actual end users of corn - feedlots, ethanol plants - $5.00/bushel is a psychological trigger point; a price at which they say "OK, we're back in business" and they can survive the corn crush and feed all those pigs and cows.
Sometimes I just can't help myself; this chart had to be drawn. It's way too early to call this any kind of a new bottom - it hasn't been tested in any meaningful way. But what is clear is that the hyperbolic trend has been broken, and pretty dramatically. I'm not a voodoo chartist, but sometimes a few lines help make an obvious point. (A "real" chartist would talk about how this could be an emerging head-and-shoulders pattern, the beginnings of a pennant formation or look to that central black trend line as the new potential point of resistance. And they'd have a long litany of reasons, too.)
This is all just (pardon the pun) speculation. But this basic question of what kind of money is in the market is crucial to understanding market dynamics. Speculators, in an abstract sense, are critical to making the futures market work. But that's speculator with a capital S - the consistent market participant. That's not necessarily the same as bandwagon jumpers who hopped on the commodities train and have now moved on to greener pastures, and at least some people claim to have evidence that that's just what's going on.
The bottom line is this: Eventually, supply and demand rule the market. No matter how many tulip-chasers enter the market, at some point there are only so many tulips and so many gardens out there. Or to torture the metaphor a bit less, there are only so many acres that can grow corn, and only so many cars and cows that can eat it. Neither supply nor demand is truly infinite, but nothing has changed in the long-term fundamentals here: There are more uses and users of corn than ever, and with both plantings and yields already at record levels, supply seems less elastic than demand. In fact, the USDA long-term projections suggest near-zero growth in planted acreage of corn over the next 10 years.
And this moderate increase in planted area, supported by increases in yield, would just about keep things in balance with the 10-year demand projections:
The implication is that we're zeroing in on a new equilibrium price for corn (and most other agricultural commodities). My guess is that for corn, it's going to keep a moving average much closer to $5.00/bushel than the historic $2-and-change.
Syngenta Poised for Growth
We remain buyers of Syngenta AG (NYSE: SYT - News) after the company's third quarter results. We retain our target price at $65 as re-rating continues. The depth of its product mix, robust business model and highly regarded management team support our positive view on the stock. We believe Syngenta is one of the safest plays on the sector, which should be reflected in higher valuations.
The depth of its product mix makes Syngenta a safe play on the sector. The long-term positives of the company's business model are backed by short-term catalysts. We remain confident in the management's execution capabilities in cost cutting. Potential for rising pay-outs should not be overlooked by investors.
Syngenta is trading at 21.0x our 2008 EPS estimate. We think the discount to Monsanto Co. (NYSE: MON - News) is still unwarranted. We are aware of Monsanto's efforts and progress in Genetic Modified seeds versus Syngenta's, which have lagged, but a 70% premium valuation is still difficult to justify.
Syngenta will soon start showing its Bioscience pipeline and valuations should expand. We believe Syngenta should trade in the 27.0x-30x range, which yields a target price of $65. The discount to its peers has become a premium as the growth prospects for the company and earnings stability drive valuations higher, but still trades at discount to its most direct peer, Monsanto. The stock may be more volatile going forward, as the premium valuation is digested by investors but we believe there is room for a move higher.
The depth of its product mix makes Syngenta a safe play on the sector. The long-term positives of the company's business model are backed by short-term catalysts. We remain confident in the management's execution capabilities in cost cutting. Potential for rising pay-outs should not be overlooked by investors.
Syngenta is trading at 21.0x our 2008 EPS estimate. We think the discount to Monsanto Co. (NYSE: MON - News) is still unwarranted. We are aware of Monsanto's efforts and progress in Genetic Modified seeds versus Syngenta's, which have lagged, but a 70% premium valuation is still difficult to justify.
Syngenta will soon start showing its Bioscience pipeline and valuations should expand. We believe Syngenta should trade in the 27.0x-30x range, which yields a target price of $65. The discount to its peers has become a premium as the growth prospects for the company and earnings stability drive valuations higher, but still trades at discount to its most direct peer, Monsanto. The stock may be more volatile going forward, as the premium valuation is digested by investors but we believe there is room for a move higher.
Monday, August 25, 2008
Potash Corp. Earnings Shouldn't Peak Until at Least 2011
When looking at Potash Corp.'s (POT) value as a publicly traded company, I think that many are missing why they are much more valuable then their current valuation. Many believe that the fertilizer stocks have been driven up just like many of the commodity stocks. Commodity stocks have had a run as the dollar has devaluated, but there is one large difference with respect to fertilizer: people have to eat. Food is a basic necessity such as heat and water and as the world's population increases its intake of meat, it will continue to increase demand for feed which is comprised mostly of corn. The basis against fertilizer is generally ethanol, as it is currently using approximately one-third of the United States' corn crop.
Another important factor with respect to many of the agricultural stocks is that they are not the boring stocks of yesterday, but more of a technology play. Look at Monsanto (MON) and their 'Roundup Ready' products. The reason farmers use Monsanto's seeds are because they raise yield. This is important, because if you have already maxed out your farmland, the only way to increase your crop is through increasing yield. This is where fertilizer comes into play as its sole purpose is to add nutrients and increase yield. If you look at many of the emerging markets, many of these countries such as China and Brazil have very low yields when compared to the United States and Canada.
Fertilizer is composed of three main nutrients: nitrogen, phosphorous, and potassium. Looking at POT, they have major production of all three. With respect to Nitrogen, they produce 2% of the world's capacity. More impressively, they produce 6% of the world's phosphorous and 22% potash. They are the third largest producer of phosphorous, the second largest producer of nitrogen and the number one producer of potash globally. Nitrogen is produced in approximately 60 countries with 57% of production controlled by world governments. Phosphorous is produced in approximately 40 countries with 47% of production controlled by governments. Potash is produced in just 12 countries and only 19% is government controlled.
Not only is POT the number one producer of the world's potash but it also has investments in other major players. It has a 10% investment in the world's sixth largest producer of potash ICL. They have a 21% interest in Sinofert of China, which is the 8th largest producer. APC, the tenth largest producer is 28% owned by POT. Lastly, They have a 32% interest in Chemical & Mining Corp. of Chile (SQM), the 13th largest producer of potash.
The most interesting situation with respect to potash is the worldwide increase in production. Most have heard that POT is increasing production dramatically and doing it within a quicker time frame, as they have mines that were shut down when the price of the commodity was not as lofty. When you look at worldwide demand growth, you see producers are looking at an increased need over a large time frame. The average mine takes five to seven years to get into the production phase while nitrogen takes three and phosphate takes three to four years.
Mosaic (MOS) has five mines in the United States and Canada. Their production for 2007 was 7.4 million tonnes, and current capacity today is 9.2 million tonnes as they complete an expansion in early 2007. They plan to increase capacity 5.1 million tonnes by 2020. Only 400 thousand tonnes of capacity will be added by 2010.
Agrium's (AGU) production for last year was 1.73 million tonnes and capacity has reached 2.06 million tonnes. They are planning an upgrade to their current mine to increase production, and also planning a new greenfield mine in Canada. Intrepid Potash (IPI) produced 790 thousand tonnes of potash in 2007 and has a reported capacity of 870 thousand tonnes. They have reported deteriorating reserves, but are planning to increase production by 250 thousand tonnes by 2011.
Foreign companies are also adding production. Belaruskali is a state run company. Their production of 8.3 million tonnes last year was generated at full capacity. In 2009 or 2010 they will have a new mine up and running that should increase production by 500 thousand tonnes. They are evaluating a new mine to replace an existing mine that is running low on reserves.
Uralkali has had some issues as of late. One of the top producers of potash in the world, they experienced flooding and a sink hole in their #1 mine. Last year they had production of 5.1 million tonnes. This is 100% of capacity. This flooding caused a loss in production of 1 million tonnes. They are currently upgrading mines #2 and #4 and estimate that these changes will increase production by 1.9 million tonnes by 2010. They will be making a decision some time this year to start a mine #5, and if they decide to progress it should be completed in 2015. No information on how they will progress with mine #1 due to the flooding.
Silvinit, like Uralkali, has outdated mines that they are currently upgrading. Last years production was 100% of capacity at 5.5 million tonnes. Last year they bid $1.5 billion for the Perm area in Russia that has an estimated 3 billion tonnes. They received a loan for the same amount to build a new mine that could be running as early as 2016. This mine could increase production by a third.
K+S produced 3.8 million tonnes last year and a capacity of 4 million. It is guessed that their production has very little chance for expansion and would guess they would see a decrease in production in the upcoming years. Most of their older mines have been shut except one. I
srael Chemicals had a production of 5.08 million tonnes and capacity of 5.68 million tonnes. Their main mine is expanding and it is estimated that they will increase production by 250 thousand tonnes this year and another 250 thousand tonnes by 2011.
The Arab Potash Company produced 1.86 million tonnes last year and has a capacity of 2.03 million tonnes. They have very low cost operations and will complete a 500 thousand tonne expansion by 2009. There is the possibility for a similar 500 thousand expansion also.
China has four companies and they produce about 3.1 million tonnes a year. None of this production is for the export market as they have a very difficult time meeting needs within their own country. By 2009, Gelmud Qingfeng Potash Fertilizer will have implemented an increase in production of 700 thousand tonnes per year. They also have projects underway that could add 2.5 million tonnes per year by sometime in 2009-2010.
Brazil has two companies Vale (RIO) and SQM. Vale produced 670 thousand tonnes and has the capacity of 850 thousand tonnes. They should be able to reach production of 100% of capacity soon. This one mine will be depleted by 2015 and they are exploring opportunities to replace production. SQM produced 690 thousand tonnes last year and has capacity of 780 thousand tonnes. They invested one billion dollars to increase potash capacity by 250 thousand tonnes per year as well as a 300 thousand tonne potassium nitrate production increase within the next three years.
Production and capacity are looking to be increased in the upcoming year by new greenfield projects. These projects take five to seven years and will have no immediate affect on supply, they only show an approximation of growing demand within that timeframe.
Eurochem is possibly going to build a 2.3 million tonne capacity mine in Russia. Paperwork was signed in July of this year to get started. Uzkhimprom has awarded contracts of $124 million to build a 200 thousand tonne per year mine. Also, Russia has auctioned three large deposits. Eurochem was awarded an estimated deposit of 1.167 billion tonnes for $170 million. Acron was awarded an estimated deposit of 682 million tonnes for $700 million. Lastly, Silvinit won an auction for $1.48 billion for an estimated deposit of 3.074 billion tonnes.
In Argentina, Rio Tinto (RTP) and Vale are both looking to start new projects, but are still evaluating content. Thailand has the possibility of a mine that could produce 1 million tonnes per year, but the mine lacks the characteristics for safety and ore grade. The government just pulled out and feasibility of the projects is being assessed. MagIndustries is planning a 600 thousand tonne mine in the Congo, while BHP Billiton (BHP) has been granted an exploration license in Ethiopia.
Even with this huge projected growth worldwide in potash production, POT is eclipsing the competition. Even if potash demand growth is only 4%, current projects just barely meet demand. This year, potash demand is not being met - even with Potash Corp.'s Lanigan increase and Uralkali's, overseas demand is still too great.
2009's growth forecast has an estimated 50% from POT alone. 2010 is the first sign of a major project other than POT going on line. Uralkali and Silvinit have production added that will add almost 3 million tonnes. An increase at POT's Cory and PL mines will also add growth. NB adds to POT's growth in 2011 while minor increases abroad have slight changes.
2012 and 2013 are the big story as all five POT projects come on-line and again they have over 50% of the increased production for the world. 2013 looks to be the only year of surplus if demand increases at 4% per year. The five past years have seen potash demand growth at 5.6%.
POT's production increases will add 9.16 million tonnes over this time frame. Taken together, and including upgrades to current facilities, POT will see production increases of 10.11 million tonnes at a cost of $6.78 billion. Overall, POT will see capacity reach 18 million tonnes. Capital spending will peak in 2010, and then a marked drop off is seen in the subsequent years, following which POT will see the largest increase in net if demand is steady. Capacity in 2012 will reach 23 million tonnes.
In summary, demand for fertilizer will increase substantially in the upcoming years as increases in demand will drive up pricing. Since most commodity bull runs last 10-15 years, there could be an increase of pricing with respect to potash for the next seven years or so.
Another thing to remember are the existing contracts that will be expiring at lower prices coupled with the fact emerging market demand for fertilizer will likely increase as farm land acreages are likely to remain the same with the exception of Brazil.
The excess capacity that POT is developing will prepare them for an even longer run if there is still increased demand going forward. Even if the ethanol situation is replaced in upcoming years with more hybrids or even liquified natural gas, it seems that increased demand will still need to be met as China's middle class will continue to grow and their current production increases will likely not meet their demand, while India's population growth will someday likely make it the largest country in the world.
I believe that POT is not only a good play in the next year, but also should see increases in earnings at least through 2011. Potash Corp. has major control in global potash pricing, and they could scale back some of their new mines if commodity pricing decreases.-Michael Filloon in seeking alpha
Another important factor with respect to many of the agricultural stocks is that they are not the boring stocks of yesterday, but more of a technology play. Look at Monsanto (MON) and their 'Roundup Ready' products. The reason farmers use Monsanto's seeds are because they raise yield. This is important, because if you have already maxed out your farmland, the only way to increase your crop is through increasing yield. This is where fertilizer comes into play as its sole purpose is to add nutrients and increase yield. If you look at many of the emerging markets, many of these countries such as China and Brazil have very low yields when compared to the United States and Canada.
Fertilizer is composed of three main nutrients: nitrogen, phosphorous, and potassium. Looking at POT, they have major production of all three. With respect to Nitrogen, they produce 2% of the world's capacity. More impressively, they produce 6% of the world's phosphorous and 22% potash. They are the third largest producer of phosphorous, the second largest producer of nitrogen and the number one producer of potash globally. Nitrogen is produced in approximately 60 countries with 57% of production controlled by world governments. Phosphorous is produced in approximately 40 countries with 47% of production controlled by governments. Potash is produced in just 12 countries and only 19% is government controlled.
Not only is POT the number one producer of the world's potash but it also has investments in other major players. It has a 10% investment in the world's sixth largest producer of potash ICL. They have a 21% interest in Sinofert of China, which is the 8th largest producer. APC, the tenth largest producer is 28% owned by POT. Lastly, They have a 32% interest in Chemical & Mining Corp. of Chile (SQM), the 13th largest producer of potash.
The most interesting situation with respect to potash is the worldwide increase in production. Most have heard that POT is increasing production dramatically and doing it within a quicker time frame, as they have mines that were shut down when the price of the commodity was not as lofty. When you look at worldwide demand growth, you see producers are looking at an increased need over a large time frame. The average mine takes five to seven years to get into the production phase while nitrogen takes three and phosphate takes three to four years.
Mosaic (MOS) has five mines in the United States and Canada. Their production for 2007 was 7.4 million tonnes, and current capacity today is 9.2 million tonnes as they complete an expansion in early 2007. They plan to increase capacity 5.1 million tonnes by 2020. Only 400 thousand tonnes of capacity will be added by 2010.
Agrium's (AGU) production for last year was 1.73 million tonnes and capacity has reached 2.06 million tonnes. They are planning an upgrade to their current mine to increase production, and also planning a new greenfield mine in Canada. Intrepid Potash (IPI) produced 790 thousand tonnes of potash in 2007 and has a reported capacity of 870 thousand tonnes. They have reported deteriorating reserves, but are planning to increase production by 250 thousand tonnes by 2011.
Foreign companies are also adding production. Belaruskali is a state run company. Their production of 8.3 million tonnes last year was generated at full capacity. In 2009 or 2010 they will have a new mine up and running that should increase production by 500 thousand tonnes. They are evaluating a new mine to replace an existing mine that is running low on reserves.
Uralkali has had some issues as of late. One of the top producers of potash in the world, they experienced flooding and a sink hole in their #1 mine. Last year they had production of 5.1 million tonnes. This is 100% of capacity. This flooding caused a loss in production of 1 million tonnes. They are currently upgrading mines #2 and #4 and estimate that these changes will increase production by 1.9 million tonnes by 2010. They will be making a decision some time this year to start a mine #5, and if they decide to progress it should be completed in 2015. No information on how they will progress with mine #1 due to the flooding.
Silvinit, like Uralkali, has outdated mines that they are currently upgrading. Last years production was 100% of capacity at 5.5 million tonnes. Last year they bid $1.5 billion for the Perm area in Russia that has an estimated 3 billion tonnes. They received a loan for the same amount to build a new mine that could be running as early as 2016. This mine could increase production by a third.
K+S produced 3.8 million tonnes last year and a capacity of 4 million. It is guessed that their production has very little chance for expansion and would guess they would see a decrease in production in the upcoming years. Most of their older mines have been shut except one. I
srael Chemicals had a production of 5.08 million tonnes and capacity of 5.68 million tonnes. Their main mine is expanding and it is estimated that they will increase production by 250 thousand tonnes this year and another 250 thousand tonnes by 2011.
The Arab Potash Company produced 1.86 million tonnes last year and has a capacity of 2.03 million tonnes. They have very low cost operations and will complete a 500 thousand tonne expansion by 2009. There is the possibility for a similar 500 thousand expansion also.
China has four companies and they produce about 3.1 million tonnes a year. None of this production is for the export market as they have a very difficult time meeting needs within their own country. By 2009, Gelmud Qingfeng Potash Fertilizer will have implemented an increase in production of 700 thousand tonnes per year. They also have projects underway that could add 2.5 million tonnes per year by sometime in 2009-2010.
Brazil has two companies Vale (RIO) and SQM. Vale produced 670 thousand tonnes and has the capacity of 850 thousand tonnes. They should be able to reach production of 100% of capacity soon. This one mine will be depleted by 2015 and they are exploring opportunities to replace production. SQM produced 690 thousand tonnes last year and has capacity of 780 thousand tonnes. They invested one billion dollars to increase potash capacity by 250 thousand tonnes per year as well as a 300 thousand tonne potassium nitrate production increase within the next three years.
Production and capacity are looking to be increased in the upcoming year by new greenfield projects. These projects take five to seven years and will have no immediate affect on supply, they only show an approximation of growing demand within that timeframe.
Eurochem is possibly going to build a 2.3 million tonne capacity mine in Russia. Paperwork was signed in July of this year to get started. Uzkhimprom has awarded contracts of $124 million to build a 200 thousand tonne per year mine. Also, Russia has auctioned three large deposits. Eurochem was awarded an estimated deposit of 1.167 billion tonnes for $170 million. Acron was awarded an estimated deposit of 682 million tonnes for $700 million. Lastly, Silvinit won an auction for $1.48 billion for an estimated deposit of 3.074 billion tonnes.
In Argentina, Rio Tinto (RTP) and Vale are both looking to start new projects, but are still evaluating content. Thailand has the possibility of a mine that could produce 1 million tonnes per year, but the mine lacks the characteristics for safety and ore grade. The government just pulled out and feasibility of the projects is being assessed. MagIndustries is planning a 600 thousand tonne mine in the Congo, while BHP Billiton (BHP) has been granted an exploration license in Ethiopia.
Even with this huge projected growth worldwide in potash production, POT is eclipsing the competition. Even if potash demand growth is only 4%, current projects just barely meet demand. This year, potash demand is not being met - even with Potash Corp.'s Lanigan increase and Uralkali's, overseas demand is still too great.
2009's growth forecast has an estimated 50% from POT alone. 2010 is the first sign of a major project other than POT going on line. Uralkali and Silvinit have production added that will add almost 3 million tonnes. An increase at POT's Cory and PL mines will also add growth. NB adds to POT's growth in 2011 while minor increases abroad have slight changes.
2012 and 2013 are the big story as all five POT projects come on-line and again they have over 50% of the increased production for the world. 2013 looks to be the only year of surplus if demand increases at 4% per year. The five past years have seen potash demand growth at 5.6%.
POT's production increases will add 9.16 million tonnes over this time frame. Taken together, and including upgrades to current facilities, POT will see production increases of 10.11 million tonnes at a cost of $6.78 billion. Overall, POT will see capacity reach 18 million tonnes. Capital spending will peak in 2010, and then a marked drop off is seen in the subsequent years, following which POT will see the largest increase in net if demand is steady. Capacity in 2012 will reach 23 million tonnes.
In summary, demand for fertilizer will increase substantially in the upcoming years as increases in demand will drive up pricing. Since most commodity bull runs last 10-15 years, there could be an increase of pricing with respect to potash for the next seven years or so.
Another thing to remember are the existing contracts that will be expiring at lower prices coupled with the fact emerging market demand for fertilizer will likely increase as farm land acreages are likely to remain the same with the exception of Brazil.
The excess capacity that POT is developing will prepare them for an even longer run if there is still increased demand going forward. Even if the ethanol situation is replaced in upcoming years with more hybrids or even liquified natural gas, it seems that increased demand will still need to be met as China's middle class will continue to grow and their current production increases will likely not meet their demand, while India's population growth will someday likely make it the largest country in the world.
I believe that POT is not only a good play in the next year, but also should see increases in earnings at least through 2011. Potash Corp. has major control in global potash pricing, and they could scale back some of their new mines if commodity pricing decreases.-Michael Filloon in seeking alpha
Fluor Corporation: Zacks Rank Buy
Fluor Corporation (NYSE: FLR - News) reported a record second quarter earlier this month. Net earnings jumped 119% to $209 million from last year's $96 million. The company mentioned that all business segments contributed to this positive result by posting solid growth in profit over last year.
FLR sees higher earnings for the year as does Wall Street
The company also hiked its guidance for the year. We are encouraged by the strength of our financial results to date, and see substantial opportunity for the balance of the year, said Chief Financial Officer Mike Steuert. As a result, we are increasing our full year guidance for Earnings Per Share to a range of $3.65 to $3.80 per share for 2008. This compares with previous guidance of $3.30 to $3.45 per share after adjusting for a two-for-one stock split that was effective on July 16, 2008.
Analysts responded with higher forecasts. Eight out of 11 covering analysts raised full-year 2008 earnings estimates from last month's $3.27 per share to $3.58.
Read our Jul 03, 2008 analysis.
Last Week's Growth and Income Zacks Rank Buy Stocks
Monsanto Company (NYSE: MON - News) recently announced its expansion of a joint venture with China National Seed Group Corp. The joint venture provides corn seed to Chinese farmers. In early August, Monsanto declared a quarterly dividend of 24 cents per share, which is payable on October 24, 2008, to shareowners of record on October 3, 2008. Read the full analysis on MON.
FLR sees higher earnings for the year as does Wall Street
The company also hiked its guidance for the year. We are encouraged by the strength of our financial results to date, and see substantial opportunity for the balance of the year, said Chief Financial Officer Mike Steuert. As a result, we are increasing our full year guidance for Earnings Per Share to a range of $3.65 to $3.80 per share for 2008. This compares with previous guidance of $3.30 to $3.45 per share after adjusting for a two-for-one stock split that was effective on July 16, 2008.
Analysts responded with higher forecasts. Eight out of 11 covering analysts raised full-year 2008 earnings estimates from last month's $3.27 per share to $3.58.
Read our Jul 03, 2008 analysis.
Last Week's Growth and Income Zacks Rank Buy Stocks
Monsanto Company (NYSE: MON - News) recently announced its expansion of a joint venture with China National Seed Group Corp. The joint venture provides corn seed to Chinese farmers. In early August, Monsanto declared a quarterly dividend of 24 cents per share, which is payable on October 24, 2008, to shareowners of record on October 3, 2008. Read the full analysis on MON.
Sunday, August 24, 2008
Monsanto Company: Zacks Rank Buy
Monsanto Company (NYSE: MON - News) recently announced its expansion of a joint venture with China National Seed Group Corp. The joint venture provides corn seed to Chinese farmers. In early August, Monsanto declared a quarterly dividend of 24 cents per share, which is payable on October 24, 2008, to shareowners of record on October 3, 2008.
Company Description
Monsanto Company is a leading global provider of technology-based solutions and agricultural products that improve farm productivity and food quality.
Growth Through Expansion
The company just announced its expansion of a joint venture with China National Seed Group Corp. The joint venture provides corn seed to Chinese farmers.
Under the deal, China Seed, a subsidiary of Sinochem Corp., and Monsanto Far East Ltd., a Monsanto subsidiary, will increase their investment in CNSGC-Dekalb Seed Co. formed in 2001. The agreement will allow the joint venture to expand its existing corn seed business by combining its business operations with the corn seed business of China Seed and providing the joint venture with access to cord seed hybrids developed by Monsanto and China Seed.
'We are pleased to increase our collaboration with China Seed to deliver elite corn hybrids to farmers within the world's second-largest corn-growing region,' said Brett Begemann, executive vice president of Monsanto. 'This investment signals a new strategic emphasis for our business in China and a new growth opportunity for our international corn seed business. We are excited about the potential that our combined efforts can have in improving farm productivity, increasing farmer incomes and helping Chinese farmers to meet both China's and the world's growing demand for grain.'
Income
In early August, Monsanto declared a quarterly dividend of 24 cents per share, which is payable on October 24, 2008, to shareowners of record on October 3, 2008.
Fundamental Growth
The company posted record results in the fiscal third quarter. Earnings per share of $1.45 topped the previous year's $1.02 and surpassed the consensus by 7%.
Net sales were a record $3.6 million, 26% higher than the year-prior. Monsanto noted that sales were helped by higher revenues from the company's Roundup agricultural herbicides globally, increased soybean seed and traits revenues in the United States, bigger corn seed and trait revenues in the United States, higher corn seed revenues in Europe-Africa, and larger cotton seed and trait revenue in the United States.
MON hiked its guidance for the year ending August 2008, stating that now it expects full-year 2008 earnings per share of $3.40 on an ongoing basis.
Wall Street is calling for $3.46 right now, an advance from two months-ago forecasts of $3.40.
More Signs of Growth
Monsanto's return on equity (ROE) of 22% dwarfs the industry average of 4%. The company's net margin of 18% is also well above the industry average of 2.9%. MON's earnings per share are expected to grow by 19% over the next 3 - 5 years, versus the industry average of 15%.
Company Description
Monsanto Company is a leading global provider of technology-based solutions and agricultural products that improve farm productivity and food quality.
Growth Through Expansion
The company just announced its expansion of a joint venture with China National Seed Group Corp. The joint venture provides corn seed to Chinese farmers.
Under the deal, China Seed, a subsidiary of Sinochem Corp., and Monsanto Far East Ltd., a Monsanto subsidiary, will increase their investment in CNSGC-Dekalb Seed Co. formed in 2001. The agreement will allow the joint venture to expand its existing corn seed business by combining its business operations with the corn seed business of China Seed and providing the joint venture with access to cord seed hybrids developed by Monsanto and China Seed.
'We are pleased to increase our collaboration with China Seed to deliver elite corn hybrids to farmers within the world's second-largest corn-growing region,' said Brett Begemann, executive vice president of Monsanto. 'This investment signals a new strategic emphasis for our business in China and a new growth opportunity for our international corn seed business. We are excited about the potential that our combined efforts can have in improving farm productivity, increasing farmer incomes and helping Chinese farmers to meet both China's and the world's growing demand for grain.'
Income
In early August, Monsanto declared a quarterly dividend of 24 cents per share, which is payable on October 24, 2008, to shareowners of record on October 3, 2008.
Fundamental Growth
The company posted record results in the fiscal third quarter. Earnings per share of $1.45 topped the previous year's $1.02 and surpassed the consensus by 7%.
Net sales were a record $3.6 million, 26% higher than the year-prior. Monsanto noted that sales were helped by higher revenues from the company's Roundup agricultural herbicides globally, increased soybean seed and traits revenues in the United States, bigger corn seed and trait revenues in the United States, higher corn seed revenues in Europe-Africa, and larger cotton seed and trait revenue in the United States.
MON hiked its guidance for the year ending August 2008, stating that now it expects full-year 2008 earnings per share of $3.40 on an ongoing basis.
Wall Street is calling for $3.46 right now, an advance from two months-ago forecasts of $3.40.
More Signs of Growth
Monsanto's return on equity (ROE) of 22% dwarfs the industry average of 4%. The company's net margin of 18% is also well above the industry average of 2.9%. MON's earnings per share are expected to grow by 19% over the next 3 - 5 years, versus the industry average of 15%.
In Support of Potash Corp.'s Projected 2008 Gross Margin Increase
About one month ago, Potash Corp. (POT) reported 2008 2nd quarter results. These results have inspired numerous articles and comments, all well worth reading, as well as the report itself.
Through these reports, it has become the practice of the CEO, William J. Doyle, to offer tremendous insights into his company, as well as the general industry trends in fertilizers.
This has resulted in a massive flow of information so strong and positive that it is difficult for anyone to digest it all in just one sitting. Therefore it seems best for all concerned to have many different articles written by many different people, in order to fully understand and appreciate what he is saying.
One set of numbers that some people may have missed concerns the projected 2008 gross margin increase. In relation to the previously announced price increases that are already in the pipeline for the remainder of 2008, he said,"We are now forecasting 2008 potash gross margin more than 300% higher than achieved in 2007," and "Our nitrogen and phosphate margins are now forecast to exceed 2007 levels by more than 85% and 200% respectively."
To better understand and appreciate what his words and numbers actually mean, it's necessary to go back to the year 2007 gross margin results for each segment, and work forward from there. These were 912.3 million for potash, 536.1 for nitrogen, and 432.8 for phosphate. These numbers must now get multiplied by their respective 2008 projected percentages to get 3649.2 for potash, 991.8 for nitrogen, and 1298.4 for phosphate. When added together, the projected 2008 total gross margin becomes 5939.4 million, or almost 6 billion, which is a 216% increase over the actual 2007 total gross margin of 1881.2 million.
Is this what has caused the recent 13 day, 20% sell-off in stock price from the close of 200.69 on July 23rd, the day before the report was issued, to the close of 160.91 on August 11th?
Or was it just a part of the 38 day, 33% sell-off from the June 17th all time record closing high of 239.5?
The year to date stock price increase at the close of the day, August 11th, 2008, was about 12%. Does this 12% increase accurately reflect a year on year projected 216% total gross margin increase? Or, am I supposed to believe that the numbers given were simply not good enough to justify the stock valuations?
Or, shall I conclude, once again, that investors simply don't understand what this company's stock is actually worth?
What I particularly like about this 216% number is that it reminds me a lot of another number, 201%, which is the 2007 stock price increase. While gross margins are only one type of measurement, and are not considered to be a reliable guide to appropriate stock valuations, I think that it is worth noting that the similarities are striking, and anything can happen in stock markets. But, let's all come back to earth and see if any of the 2nd quarter facts can actually support what are, after all, only forward looking statements.
The 2008 2nd quarter gross margin for potash was 886.4, which is 240% higher than 2007's 2nd quarter gross margin of 260.4. The 2008 1st half gross margin for potash was 1.4 billion which is 222% higher than 2007's 1st half gross margin of 434.6 million.Therefore, both the 2008 2nd quarter and 1st half factual percentages for potash gross margin increase more than support Mr. Doyle's 216% forward looking statement.
The 2008 2nd quarter gross margin for phosphate was 340.9, which is 252% higher than 2007's 2nd quarter gross margin of 96.8. The 2008 1st half gross margin for phosphate was 496.9, which is 209% higher than 2007's 1st half gross margin of 161.0 million. So the phosphate numbers for 2008, so far, also lend support to Mr. Doyle, and the future is looking more and more possible.
It should be mentioned here that the 2008 1st half gross margin for potash, 1.4 billion, has already surpassed the TOTAL 2007 gross margin for potash, 912.3, by 53%. Meanwhile, the 2008 1st half gross margin for phosphate, 496.9 has already surpassed the TOTAL 2007 gross margin for phosphate, 432.8, by 15%.Therefore both of these segments are already well on their way to meet Mr. Doyle's expectations.
Nitrogen is a somewhat different story, as Potash Corp. does not produce natural gas itself. It must buy it at market prices or through long term contracts. These activities resulted in 11.8 million in hedging gains, which somewhat offset the negative impact of higher priced natural gas, which was 76% higher YoY, 2nd quarter.
Even so, the nitrogen segment recorded a record 210.0 in 2008 2nd quarter gross margin, which is 46% higher than the 144.2 from 2007's 2nd quarter. This was in spite of 25% lower ammonia volumes, caused by a 53 day shutdown at their Trinidad 04 plant, a 31% drop in nitrogen solutions caused by the late spring, and restricted availability of production inputs.
In other words, the nitrogen segment had a challenging 2nd quarter, but still managed to do astoundingly well. The 2008 1st half gross margin for nitrogen was 395.4, which is 44% higher than the 2007 1st half gross margin of 275.5, and therefore also a record.
At this point, I would like to add that almost any CEO of almost any company outside of the agriculture sector would simply drool with envy at these kinds of results. If the nitrogen segment was spun off as a separate company, at an appropriate market valuation, it would be an excellent investment opportunity in itself. As it has the world's second largest capacity for agriculture nitrogen, as well as the world's largest capacity for industrial nitrogen, the nitrogen segment at Potash Corp. is no small matter, and will be covered in a future article.
However by "establishing a new standard of performance for the company," the nitrogen segment can't quite measure up to the high octane over-performance of both the potash and phosphate segments. This is what "held down" the 2008 2nd quarter total gross margin to 1.4 billion, which is a 187% increase over the 2007 2nd quarter total gross margin, of 501.4, for all three segments combined. The 2008 1st half total gross margin was 2.3 billion,which is 164% higher than the 2007 1st half total gross margin of 871.1, for all three segments combined. The 2008 1st half total gross margin has already exceeded the record FULL YEAR 2007 total gross margin of 1.9 billion by 21%, so there is not too far to go to reach 216%, and two whole quarters to get there.
In the pipeline, of course, is the revolving door effect of ever increasing prices for the potash, phosphate, and nitrogen contracts. These kick in during the third, and especially the fourth, quarter 2008 and beyond, as far as the eye can see. These agreed upon higher prices for the previously agreed upon volumes, modified by the projected costs, are what ultimately support Mr. Doyle's projected 2008 total gross margin increase of 216% at Potash Corp.
History will soon prove how much Mr. Doyle has UNDERSTATED the case.
seeking alpha
Through these reports, it has become the practice of the CEO, William J. Doyle, to offer tremendous insights into his company, as well as the general industry trends in fertilizers.
This has resulted in a massive flow of information so strong and positive that it is difficult for anyone to digest it all in just one sitting. Therefore it seems best for all concerned to have many different articles written by many different people, in order to fully understand and appreciate what he is saying.
One set of numbers that some people may have missed concerns the projected 2008 gross margin increase. In relation to the previously announced price increases that are already in the pipeline for the remainder of 2008, he said,"We are now forecasting 2008 potash gross margin more than 300% higher than achieved in 2007," and "Our nitrogen and phosphate margins are now forecast to exceed 2007 levels by more than 85% and 200% respectively."
To better understand and appreciate what his words and numbers actually mean, it's necessary to go back to the year 2007 gross margin results for each segment, and work forward from there. These were 912.3 million for potash, 536.1 for nitrogen, and 432.8 for phosphate. These numbers must now get multiplied by their respective 2008 projected percentages to get 3649.2 for potash, 991.8 for nitrogen, and 1298.4 for phosphate. When added together, the projected 2008 total gross margin becomes 5939.4 million, or almost 6 billion, which is a 216% increase over the actual 2007 total gross margin of 1881.2 million.
Is this what has caused the recent 13 day, 20% sell-off in stock price from the close of 200.69 on July 23rd, the day before the report was issued, to the close of 160.91 on August 11th?
Or was it just a part of the 38 day, 33% sell-off from the June 17th all time record closing high of 239.5?
The year to date stock price increase at the close of the day, August 11th, 2008, was about 12%. Does this 12% increase accurately reflect a year on year projected 216% total gross margin increase? Or, am I supposed to believe that the numbers given were simply not good enough to justify the stock valuations?
Or, shall I conclude, once again, that investors simply don't understand what this company's stock is actually worth?
What I particularly like about this 216% number is that it reminds me a lot of another number, 201%, which is the 2007 stock price increase. While gross margins are only one type of measurement, and are not considered to be a reliable guide to appropriate stock valuations, I think that it is worth noting that the similarities are striking, and anything can happen in stock markets. But, let's all come back to earth and see if any of the 2nd quarter facts can actually support what are, after all, only forward looking statements.
The 2008 2nd quarter gross margin for potash was 886.4, which is 240% higher than 2007's 2nd quarter gross margin of 260.4. The 2008 1st half gross margin for potash was 1.4 billion which is 222% higher than 2007's 1st half gross margin of 434.6 million.Therefore, both the 2008 2nd quarter and 1st half factual percentages for potash gross margin increase more than support Mr. Doyle's 216% forward looking statement.
The 2008 2nd quarter gross margin for phosphate was 340.9, which is 252% higher than 2007's 2nd quarter gross margin of 96.8. The 2008 1st half gross margin for phosphate was 496.9, which is 209% higher than 2007's 1st half gross margin of 161.0 million. So the phosphate numbers for 2008, so far, also lend support to Mr. Doyle, and the future is looking more and more possible.
It should be mentioned here that the 2008 1st half gross margin for potash, 1.4 billion, has already surpassed the TOTAL 2007 gross margin for potash, 912.3, by 53%. Meanwhile, the 2008 1st half gross margin for phosphate, 496.9 has already surpassed the TOTAL 2007 gross margin for phosphate, 432.8, by 15%.Therefore both of these segments are already well on their way to meet Mr. Doyle's expectations.
Nitrogen is a somewhat different story, as Potash Corp. does not produce natural gas itself. It must buy it at market prices or through long term contracts. These activities resulted in 11.8 million in hedging gains, which somewhat offset the negative impact of higher priced natural gas, which was 76% higher YoY, 2nd quarter.
Even so, the nitrogen segment recorded a record 210.0 in 2008 2nd quarter gross margin, which is 46% higher than the 144.2 from 2007's 2nd quarter. This was in spite of 25% lower ammonia volumes, caused by a 53 day shutdown at their Trinidad 04 plant, a 31% drop in nitrogen solutions caused by the late spring, and restricted availability of production inputs.
In other words, the nitrogen segment had a challenging 2nd quarter, but still managed to do astoundingly well. The 2008 1st half gross margin for nitrogen was 395.4, which is 44% higher than the 2007 1st half gross margin of 275.5, and therefore also a record.
At this point, I would like to add that almost any CEO of almost any company outside of the agriculture sector would simply drool with envy at these kinds of results. If the nitrogen segment was spun off as a separate company, at an appropriate market valuation, it would be an excellent investment opportunity in itself. As it has the world's second largest capacity for agriculture nitrogen, as well as the world's largest capacity for industrial nitrogen, the nitrogen segment at Potash Corp. is no small matter, and will be covered in a future article.
However by "establishing a new standard of performance for the company," the nitrogen segment can't quite measure up to the high octane over-performance of both the potash and phosphate segments. This is what "held down" the 2008 2nd quarter total gross margin to 1.4 billion, which is a 187% increase over the 2007 2nd quarter total gross margin, of 501.4, for all three segments combined. The 2008 1st half total gross margin was 2.3 billion,which is 164% higher than the 2007 1st half total gross margin of 871.1, for all three segments combined. The 2008 1st half total gross margin has already exceeded the record FULL YEAR 2007 total gross margin of 1.9 billion by 21%, so there is not too far to go to reach 216%, and two whole quarters to get there.
In the pipeline, of course, is the revolving door effect of ever increasing prices for the potash, phosphate, and nitrogen contracts. These kick in during the third, and especially the fourth, quarter 2008 and beyond, as far as the eye can see. These agreed upon higher prices for the previously agreed upon volumes, modified by the projected costs, are what ultimately support Mr. Doyle's projected 2008 total gross margin increase of 216% at Potash Corp.
History will soon prove how much Mr. Doyle has UNDERSTATED the case.
seeking alpha
Thursday, August 21, 2008
A Perfect Storm for Terra Industries
Terra Industries (TRA) is enjoying a perfect storm for its business. Terra produces nitrogen based fertilizer products. As I'm sure everyone has heard, there is an agriculture boom taking place in the U.S. right now. Farm commodities are trading at their highest prices in decades. Ethanol and overseas food demand has led to a boom in corn production, as per-bushel prices have increased nearly threefold over just 2 years ago.
Nearly as important is the fact that natural gas prices, Terra's single largest input cost by far, have come way down over the past few months. Completing the trifecta of profitability for this company is the fact that international bulk shipping rates have remained high, which puts Terra's overseas competition at a disadvantage.
The results on Terra's business have been dramatic. Sales jumped 29% last year, and are on track for another 20% expansion this year. The one-two punch of high corn and low nat gas prices have kicked gross margin to near 30%, vs. a 5 year average around 10%. This has pushed trailing twelve month net income to $466 million. To put this in perspective, $466 million in net income is more than twice as much as Terra has ever earned in a single year. Current MFI return on capital is a nifty 72%.
But this is a classic case of the Magic Formula digging up an unattractive investment. The first question that MagicDiligence asks is: "Can the company sustain its high return on capital?" For Terra, it is highly unlikely. First, let's just take a look at history. Before this "perfect storm", Terra had 6 consecutive yearly losses from 1998-2003. Its average MFI return on capital for the profitable years was about 6%, utterly pathetic. The company was barely earning enough to cover debt interest payments. To maintain current profitability, Terra has to hope corn prices can hold levels near $6, natural gas prices hold steady, and shipping rates stay high for the foreseeable future. Is this likely?
MagicDiligence thinks it is not likely. Corn has traded in the $2.50-$3.00 range for nearly 20 years, and while it's conceivable that the median range will rise due to demand, it strikes me as unlikely that $6 is a sustainable level. In any case, corn supply is fairly easy to increase. More and more farmers will plant more and more acres of it, trying to take advantage of high prices. Of course, this fills the market with a glut of supply, and prices crater. It happens all the time with commodities. It is such a fragmented market that there is no hope of rational production when prices rise. SmartMoney even had a recent article about how well farmers were doing... a sign of a bubble if there ever was one.
Also, fertilizer production is a no-moat business. Fertilizer is fertilizer, and farmers will buy based primarily on price. While Terra has some domestic price advantages right now, a decrease in shipping rates can swing the pendulum back in favor of it's overseas competition. And that's not even mentioning natural gas, which accounts for over 70% of product cost.
Terra as a company has little control over its future. Its fate is dependent on external factors outside the company's control. This makes it extremely unpredictable, and a stock that MFI investors should avoid.
Nearly as important is the fact that natural gas prices, Terra's single largest input cost by far, have come way down over the past few months. Completing the trifecta of profitability for this company is the fact that international bulk shipping rates have remained high, which puts Terra's overseas competition at a disadvantage.
The results on Terra's business have been dramatic. Sales jumped 29% last year, and are on track for another 20% expansion this year. The one-two punch of high corn and low nat gas prices have kicked gross margin to near 30%, vs. a 5 year average around 10%. This has pushed trailing twelve month net income to $466 million. To put this in perspective, $466 million in net income is more than twice as much as Terra has ever earned in a single year. Current MFI return on capital is a nifty 72%.
But this is a classic case of the Magic Formula digging up an unattractive investment. The first question that MagicDiligence asks is: "Can the company sustain its high return on capital?" For Terra, it is highly unlikely. First, let's just take a look at history. Before this "perfect storm", Terra had 6 consecutive yearly losses from 1998-2003. Its average MFI return on capital for the profitable years was about 6%, utterly pathetic. The company was barely earning enough to cover debt interest payments. To maintain current profitability, Terra has to hope corn prices can hold levels near $6, natural gas prices hold steady, and shipping rates stay high for the foreseeable future. Is this likely?
MagicDiligence thinks it is not likely. Corn has traded in the $2.50-$3.00 range for nearly 20 years, and while it's conceivable that the median range will rise due to demand, it strikes me as unlikely that $6 is a sustainable level. In any case, corn supply is fairly easy to increase. More and more farmers will plant more and more acres of it, trying to take advantage of high prices. Of course, this fills the market with a glut of supply, and prices crater. It happens all the time with commodities. It is such a fragmented market that there is no hope of rational production when prices rise. SmartMoney even had a recent article about how well farmers were doing... a sign of a bubble if there ever was one.
Also, fertilizer production is a no-moat business. Fertilizer is fertilizer, and farmers will buy based primarily on price. While Terra has some domestic price advantages right now, a decrease in shipping rates can swing the pendulum back in favor of it's overseas competition. And that's not even mentioning natural gas, which accounts for over 70% of product cost.
Terra as a company has little control over its future. Its fate is dependent on external factors outside the company's control. This makes it extremely unpredictable, and a stock that MFI investors should avoid.
Monsanto, Chinese company expanding seed venture
Monsanto, Chinese company plan to boost investments in Chinese corn seed venture
ST. LOUIS (AP) -- Monsanto Co. and China National Seed Group Corp. on Thursday say they will expand their joint venture that provides corn seed to Chinese farmers.
Under the deal, China Seed, a subsidiary of Sinochem Corp., and Monsanto Far East Ltd., a Monsanto subsidiary, will increase their investment in CNSGC-Dekalb Seed Co. formed in 2001. The agreement will allow the joint venture to expand its existing corn seed business by combining its business operations with the corn seed business of China Seed and providing the joint venture with access to cord seed hybrids developed by Monsanto and China Seed.
Monsanto will invest $84 million in the joint venture while China Seed will contribute its existing corn seed business assets. China Seed will continue to own 51 percent in the joint venture.
According to the companies, Chinese farmers plant 67 million acres of corn annually, making it the world's second largest corn growing region.
ST. LOUIS (AP) -- Monsanto Co. and China National Seed Group Corp. on Thursday say they will expand their joint venture that provides corn seed to Chinese farmers.
Under the deal, China Seed, a subsidiary of Sinochem Corp., and Monsanto Far East Ltd., a Monsanto subsidiary, will increase their investment in CNSGC-Dekalb Seed Co. formed in 2001. The agreement will allow the joint venture to expand its existing corn seed business by combining its business operations with the corn seed business of China Seed and providing the joint venture with access to cord seed hybrids developed by Monsanto and China Seed.
Monsanto will invest $84 million in the joint venture while China Seed will contribute its existing corn seed business assets. China Seed will continue to own 51 percent in the joint venture.
According to the companies, Chinese farmers plant 67 million acres of corn annually, making it the world's second largest corn growing region.
Wednesday, August 20, 2008
Israel Chemicals Joins Fertilizer Boomers
LONDON - Israel Chemicals has joined the club of fertilizer and potash companies that have reported staggering growth in the second quarter, thanks soaring prices and strong demand from emerging markets.
The producer of potash and phosphate fertilizers and specialty chemicals rose 2.04 New Israeli Shekel (57 cents), or 3.4%, to 61.35 New Israeli Shekel ($17.15), after announcing that its net income increased more than five fold during the second quarter, soaring to $703.2 million, or 10 cents a share, from $129.0 million, or 54 cents a share, a year earlier. Analysts had been expecting net profits of around $485.0 million.
The company said a strong rise in the demand for potash and phosphates had helped offset rising raw material, energy and transportation costs, as well as the appreciation of the New Israeli Shekel against the American dollar. Total sales for the quarter more than doubled to $2.0 billion.
Israel Chemicals joins fertilizer producers, including Terra Nitrogen (nyse: TNH - news - people ), Potash Corp (nyse: POT - news - people ) of Saskatchewan, and Bunge (nyse: BG - news - people ) in reporting strong profits in the second quarter. (See "Fertilizer Stocks Sprout Gains.")
Demand for fertilizers has been booming as the world's population grows and becomes wealthier, particularly in emerging markets. This has left middle-class consumers with more money to spend on food, including products like meat, increasing demand for grains for animal feed when global supply is already tight. At the end of July, fertilizer-maker Mosaic (nyse: MOS - news - people ) said it expected demand for potash to grow by a further 7.0%, in 2009, with demand from India being a significant factor. (See "Potash Prices Push Higher.")
In a note to investors, Citigroup analyst Sophie Jourdier said Israel Chemical's "very strong" results had benefited from the sale of 200 kilo tons of potash and phosphate rock in inventories. According to Jourdier, the company also benefited from the long-term contracts it had with sulfur suppliers, which meant that it was largely immune to the nearly tenfold increase in sulfur prices over the past year.
Israel Chemicals (other-otc: ISCHF - news - people ) produces low-cost fertilizers and has benefited from its strong links to emerging markets in China, India and Brazil, which account for nearly half its annual sales.
The producer of potash and phosphate fertilizers and specialty chemicals rose 2.04 New Israeli Shekel (57 cents), or 3.4%, to 61.35 New Israeli Shekel ($17.15), after announcing that its net income increased more than five fold during the second quarter, soaring to $703.2 million, or 10 cents a share, from $129.0 million, or 54 cents a share, a year earlier. Analysts had been expecting net profits of around $485.0 million.
The company said a strong rise in the demand for potash and phosphates had helped offset rising raw material, energy and transportation costs, as well as the appreciation of the New Israeli Shekel against the American dollar. Total sales for the quarter more than doubled to $2.0 billion.
Israel Chemicals joins fertilizer producers, including Terra Nitrogen (nyse: TNH - news - people ), Potash Corp (nyse: POT - news - people ) of Saskatchewan, and Bunge (nyse: BG - news - people ) in reporting strong profits in the second quarter. (See "Fertilizer Stocks Sprout Gains.")
Demand for fertilizers has been booming as the world's population grows and becomes wealthier, particularly in emerging markets. This has left middle-class consumers with more money to spend on food, including products like meat, increasing demand for grains for animal feed when global supply is already tight. At the end of July, fertilizer-maker Mosaic (nyse: MOS - news - people ) said it expected demand for potash to grow by a further 7.0%, in 2009, with demand from India being a significant factor. (See "Potash Prices Push Higher.")
In a note to investors, Citigroup analyst Sophie Jourdier said Israel Chemical's "very strong" results had benefited from the sale of 200 kilo tons of potash and phosphate rock in inventories. According to Jourdier, the company also benefited from the long-term contracts it had with sulfur suppliers, which meant that it was largely immune to the nearly tenfold increase in sulfur prices over the past year.
Israel Chemicals (other-otc: ISCHF - news - people ) produces low-cost fertilizers and has benefited from its strong links to emerging markets in China, India and Brazil, which account for nearly half its annual sales.
Tuesday, August 19, 2008
POTASH SEES SOME UPSIDE IF WORKERS STRIKE
When things are really clicking for an industry, even prospectively problematic news can be turned into a constructive development. There’s just such a pony under this pile for fertilizer maker Potash (POT), which is locked in a contentious labor battle with unions representing workers at some of its mining operations. Union representatives at three of its mines have asked the company to share the wealth from its recent prosperity, asking for what’s effectively a windfall profits bonus for employees. The company insisted that, based on its accounting of the union’s requests, that it would cost $157,000 per employee to accede to the request. Presuming workers at all five mines in Canada received the same largesse, the company figured it could cost $185 million this year to share the wealth with its workers. The union, which has struck at three mines, has disputed the accounting, describing the $157,000 figure as ”just ridiculous,” and insisting it wouldn’t consider asking for such a payout. Nevertheless, Potash has warned that the strikes could hit its industrial shipments, perhaps trimming 5% of those, though it hasn’t calculated the impact that the strikes have on its fertilizer or agricultural shipments. Potash shares have climbed 3% Tuesday.
Outperforming Ag - Mosaic (MOS), Agrium (AGU), Potash (POT)
Beaten down ag names such as Mosaic, Agrium and Potash all traded higher despite falling significantly last month. I don’t think the ag story is over, says Pete Najarian. However I also don’t think the current unwind is over, either.Barrons
Monday, August 18, 2008
Agribusiness Is Still Flourishing
Even though commodities' prices have come down from record highs, agribusiness is hardly a fallow sector, Citi Analyst Brian Yu said, deeming fears of slowed agricultural demand "misplaced" in a Sunday note on agricultural commodities.
"We are not suggesting that a global slowdown will have zero impact on grain demand, but [we] want to highlight the weak historical correlation," Yu said. "The point is that fertilizer stocks are being grouped with industrial metals and energy when the supply-demand characteristics are arguably very different."
Shares rallied throughout the agribusiness sector on Monday as Yu said rising cattle and hog prices coupled with low global grain stockpiles bode well for fertilizer fundamentals. Increased meat consumption keeps corn in high demand since the crop accounts for 61.0% of animal feed. That, combined with tight global grain supply, means farmers will continue to invest in fertilizers as a way to maximize crop yields. The Market Vectors Agribusiness exchange-traded fund gained 80 cents, or 1.6% to close Monday's trading session at $49.95.
Soaring fertilizer prices sparked investor concerns of a bubble, especially as corn prices went on a six-week slide on reports that Midwestern flooding didn't destroy as many crops as initially feared. (See " Crops To The Rescue.")
"There is a big different between equities that trade at a low multiple because fundamentals/pricing/earnings are deteriorating and equities that trade at a low multiple [since] earnings expectations are rising while prices have lagged," Yu said, adding that he thinks fertilizers fall into the latter category and reiterating "buy" ratings on Agrium (nyse: AGU - news - people ), CF Industries (nyse: CF - news - people ), Mosaic (nyse: MOS - news - people ), Potash (nyse: POT - news - people ) and Terra Industries (nyse: TRA - news - people ).
Mosaic shares gained 6.1%, adding $5.90 to close Monday's session at $103.42, and CF Industries rose 1.9%, or $2.43, to $131.38. Agrium and CF Industries both added $2.03, or 2.6% for Agrium, which closed at $80.44 and 1.9% for CF Industries, to close at $131.38. Potash rose by 0.1%, adding 23 cents to $170.04.
Yu believes Potash's sell-off--the stock has lost nearly 19.0% in the last month--is overdone, especially since data on Friday showed potash producer inventories fell by 10.0% since July.
"We are not suggesting that a global slowdown will have zero impact on grain demand, but [we] want to highlight the weak historical correlation," Yu said. "The point is that fertilizer stocks are being grouped with industrial metals and energy when the supply-demand characteristics are arguably very different."
Shares rallied throughout the agribusiness sector on Monday as Yu said rising cattle and hog prices coupled with low global grain stockpiles bode well for fertilizer fundamentals. Increased meat consumption keeps corn in high demand since the crop accounts for 61.0% of animal feed. That, combined with tight global grain supply, means farmers will continue to invest in fertilizers as a way to maximize crop yields. The Market Vectors Agribusiness exchange-traded fund gained 80 cents, or 1.6% to close Monday's trading session at $49.95.
Soaring fertilizer prices sparked investor concerns of a bubble, especially as corn prices went on a six-week slide on reports that Midwestern flooding didn't destroy as many crops as initially feared. (See " Crops To The Rescue.")
"There is a big different between equities that trade at a low multiple because fundamentals/pricing/earnings are deteriorating and equities that trade at a low multiple [since] earnings expectations are rising while prices have lagged," Yu said, adding that he thinks fertilizers fall into the latter category and reiterating "buy" ratings on Agrium (nyse: AGU - news - people ), CF Industries (nyse: CF - news - people ), Mosaic (nyse: MOS - news - people ), Potash (nyse: POT - news - people ) and Terra Industries (nyse: TRA - news - people ).
Mosaic shares gained 6.1%, adding $5.90 to close Monday's session at $103.42, and CF Industries rose 1.9%, or $2.43, to $131.38. Agrium and CF Industries both added $2.03, or 2.6% for Agrium, which closed at $80.44 and 1.9% for CF Industries, to close at $131.38. Potash rose by 0.1%, adding 23 cents to $170.04.
Yu believes Potash's sell-off--the stock has lost nearly 19.0% in the last month--is overdone, especially since data on Friday showed potash producer inventories fell by 10.0% since July.
Potash Corp. advances as analyst boosts rating
Shares of fertilizer maker Potash Corp. of Saskatchewan gain after analyst hikes rating
NEW YORK (AP) -- Shares of Potash Corp. of Saskatchewan Inc., the world's largest fertilizer company, ticked higher Monday after a Citi Investment Research analyst boosted his rating on the stock.
Its stock rose $4.09, or 2.4 percent, to $173.97 in morning trading.
Brian Yu, who maintains a "Buy" rating and a $264 price target on the shares, added the stock to his "Top Picks Live" group in a client note.
The analyst said data released Friday shows that North American potash inventories fell 10 percent last month from June to a level that is 35 percent below its five-year average. A tighter supply of fertilizer helps lift its price.
Yu, who believes a 26 percent selloff since July 14 is overdone, said the stock has suffered along with materials and energy sectors as concerns mount about prospects for global growth.
He noted that fertilizer prices are rising and grain production is not cyclical as are industrial metals.
The current value of Potash Corp. of Saskatchewan Inc. shares is "discounting a far worse earnings scenario than fundamentals indicate," Yu said.
NEW YORK (AP) -- Shares of Potash Corp. of Saskatchewan Inc., the world's largest fertilizer company, ticked higher Monday after a Citi Investment Research analyst boosted his rating on the stock.
Its stock rose $4.09, or 2.4 percent, to $173.97 in morning trading.
Brian Yu, who maintains a "Buy" rating and a $264 price target on the shares, added the stock to his "Top Picks Live" group in a client note.
The analyst said data released Friday shows that North American potash inventories fell 10 percent last month from June to a level that is 35 percent below its five-year average. A tighter supply of fertilizer helps lift its price.
Yu, who believes a 26 percent selloff since July 14 is overdone, said the stock has suffered along with materials and energy sectors as concerns mount about prospects for global growth.
He noted that fertilizer prices are rising and grain production is not cyclical as are industrial metals.
The current value of Potash Corp. of Saskatchewan Inc. shares is "discounting a far worse earnings scenario than fundamentals indicate," Yu said.
On Visa and Commodities: An Addendum
Visa (V) has a great model and in the long run will be a great stock. Visa, once the economy rises and we have a sound financial sector, will continue to go up to eventually surpass MasterCard (MA).
But recent events show that Visa, like any other stock, is not bullet proof. Visa is susceptible to the financial sector. It is susceptible to the economy. It is susceptible to a BEAR market. It is susceptible to the rise in oil. Not because I say so. Because Wall Street says so. Despite the fact that Visa had stellar earnings, it did not rise to the expectations of many.
I predict Visa will have a new leg this year. It may even see 90. I see signs that point to an illusionary rise in the financials. Mainly due to one analyst boasting that the financials have hit a bottom (I disagree), the drop in oil prices, and out of favor commodity markets.
I wrote another article on the inelasticity of supply side oil prices. The acceleration to this scenario will be if there is a military confrontation with Iran later this year. The ingredients for such an event happening is becoming more real. I say be ready. I plan to pull out of Visa once it breaks 80 again, (I bought at the IPO price and high 50s).
Now is a great opportunity, in my opinion, to stack up on commodities. Fertilizers, coal, and oil are dirt cheap. The storm is brewing in my opinion. Should the Iran confrontation occur as I predict, commodities will hit the roof. Timing is everything, especially in the commodities market. That is why I did not panic early in July when commodities went down. I feel that this was a temporary correction. The next commodity rise will happen as soon as supply side effects in oil prices go up. This will happen sooner than you think..Frank Maura
But recent events show that Visa, like any other stock, is not bullet proof. Visa is susceptible to the financial sector. It is susceptible to the economy. It is susceptible to a BEAR market. It is susceptible to the rise in oil. Not because I say so. Because Wall Street says so. Despite the fact that Visa had stellar earnings, it did not rise to the expectations of many.
I predict Visa will have a new leg this year. It may even see 90. I see signs that point to an illusionary rise in the financials. Mainly due to one analyst boasting that the financials have hit a bottom (I disagree), the drop in oil prices, and out of favor commodity markets.
I wrote another article on the inelasticity of supply side oil prices. The acceleration to this scenario will be if there is a military confrontation with Iran later this year. The ingredients for such an event happening is becoming more real. I say be ready. I plan to pull out of Visa once it breaks 80 again, (I bought at the IPO price and high 50s).
Now is a great opportunity, in my opinion, to stack up on commodities. Fertilizers, coal, and oil are dirt cheap. The storm is brewing in my opinion. Should the Iran confrontation occur as I predict, commodities will hit the roof. Timing is everything, especially in the commodities market. That is why I did not panic early in July when commodities went down. I feel that this was a temporary correction. The next commodity rise will happen as soon as supply side effects in oil prices go up. This will happen sooner than you think..Frank Maura
Friday, August 15, 2008
Deere Runs with Worldwide Sales
With the economy going up and down, it has made many investors wary of making investments with respect to the long term. Even though the market has suffered, there are still a few good plays. Many areas are in long term bull markets that, in my opinion, are just taking a breather and the smart investor could make a bundle jumping in at today's prices. I have hammered the agricultural bull over and over and still believe that it has legs going forward. If you look at my call on CNH Global (CNH) you will see why many companies do look good going forward.
Deere & Co. (DE) seems be a good investment after a disappointing third quarter. In my estimation, DE has been hammered by its exposure to construction equipment, as the United States is in its second worst housing environment in history, second only to the Great Depression. Investors are overly interested in the price of steel margins, but are not as concerned with the price of fertilizer.
Even with the swift decline in the price of natural gas in the United States, we will see worldwide prices increase for some time to come. The price decline is mostly attributed to a "looking ahead" view of the increase in value of the US dollar and not demand. Natural gas prices have not just risen because of demand for heating homes, but because of a massive need of nitrogen fertilizer. Nitrogen is the main component of fertilizer, and corn needs a large amount of fertilizer when compared to other agricultural commodities. I think long term we will see the price of natural gas increase based on the fact that all fertilizer companies will continue to raise prices in the upcoming years.
A major problem that DE seems to be having is meeting demand with respect to combine and large tractor demand overseas. DE's growth in combine sales is less than that of both its competitors, AGCO (AG) and CNH. This isn't due to waning demand but rather due to DE's inability to increase production. This should be met with a 30% combine capacity increase next year, as it has made a $35 million investment in its Illinois facility. I believe this will remedy its capacity issues going forward. In the second quarter it made a $90 investment in itslarge tractor facility in Iowa that will increase capacity by 25%.
DE's third quarter was quite good as it reported a net sales increase of 17%, while net income increased 7%, and diluted EPS was up 12% year over year for the quarter. Equipment operations sales were up approximately 18%. Forecasts for sales of the fourth quarter of this year will increase 29% year over year for the quarter. The full year will be up 21%, a percentage point higher than previously estimated.
From an agricultural standpoint, production tonnage from the 3rd quarter of 2007 increased 28%. Net sales were up 35% and operating profit increased 47%. Looking at crop prices, the Wall Street Journal shows that in January of 2002 soybeans were at a little over $4 a bushel, while corn was at $2 and wheat just under $3. Respectively, those prices have increased to approximately $14, $6 and $7.50 per bushel. It is estimated that we will have the second largest corn crop in history. This will take more combines and large tractors to harvest it. With that, Brazil is rapidly expanding its farmland at expense of the rainforest to grow more soybeans. This will continue to increase demand over the long haul.
Also, if we look at DE's estimate on commodity prices for 2008/2009 we see an increase in the value of all three commodities. If the prices continue to increase, even with the dollar beginning to rebound, it is easily determined that crops will continue to expand, harvests will continue to increase and machinery will be needed. This year's corn price estimate for the full year is $4.45/bushel and will increase to $5.50 next year. Wheat's estimate is $6.92 this year and $7.74 next. Soybeans are $10.60 this year, and $13.50 next. Respectively, these crops were just $3.04, $4.26, and $6.43 for last year.
This is why DE is forecasting agricultural equipment growth of 20%-25% for this year, up 5% in the last quarter for the US and Canada. South American sales were increased for this year to 40% up from 30%. Western Europe has increased to 5% from earlier estimates of 3-5%. Central Europe and Russian demand is increasingly rapidly but there are no growth estimates for these areas of the world. Worldwide net sales are estimated to be up 38% which is a 3 point increase over last quarters estimates for the year.
Looking at worldwide construction and consumer equipment, sales are down 1% year over year and costs will decrease profit by 28%. Even with this net sales should be up 4% for the year. Worldwide construction and forestry will see sales slip 7% and operating profit decrease by 38%. Net sales to be projected down 5% for the full year in this area of business. With respect to third quarter net sales construction and forestry, and construction and commercial accounted for $2.526 billion where agricultural net sales were $4.544 billion. This number shows that the weakness in the other two areas may have caused a bearishness that is too extreme as agricultural growth rates will offset this weakness until there is an improvement in this area.
To keep investors up to date on the importance of agricultural sales, in July, US and Canadian sales saw row tractors for the industry up 38%, while DE saw a much larger increase for that month by double digits more than the industry. Over that same period the industry saw 4WD tractor sales up 49%, while DE saw a bigger increase in sales by double digits again. Combine sales for DE were weaker than the industry but growth was at 31%. DE's combine and row-crop tractors inventorys decreased year over year. Western Europe sales for comines increased in the triple digits for DE and tractors increased in the single digits.
Lastly, looking at share repurchases and dividend increases, DE seems attractive. As of May 28th of this year authorization was made for $5 billion in stock repurchases. The dividend rate increased 12% payable August first of this year. Since 2004 DE has increased its annualized dividend rate by 155%. This shows the companies long term confidence that their stock price is low and that growth looks good going forward. It is estimated that as much as a third of the corn crop could go to ethanol production this year. If these plans stay on task, we could see large increases in crop prices for the next few years and increases in farm land throughout the world. With DE's worldwide, exposure it is a great play going forward.
Deere & Co. (DE) seems be a good investment after a disappointing third quarter. In my estimation, DE has been hammered by its exposure to construction equipment, as the United States is in its second worst housing environment in history, second only to the Great Depression. Investors are overly interested in the price of steel margins, but are not as concerned with the price of fertilizer.
Even with the swift decline in the price of natural gas in the United States, we will see worldwide prices increase for some time to come. The price decline is mostly attributed to a "looking ahead" view of the increase in value of the US dollar and not demand. Natural gas prices have not just risen because of demand for heating homes, but because of a massive need of nitrogen fertilizer. Nitrogen is the main component of fertilizer, and corn needs a large amount of fertilizer when compared to other agricultural commodities. I think long term we will see the price of natural gas increase based on the fact that all fertilizer companies will continue to raise prices in the upcoming years.
A major problem that DE seems to be having is meeting demand with respect to combine and large tractor demand overseas. DE's growth in combine sales is less than that of both its competitors, AGCO (AG) and CNH. This isn't due to waning demand but rather due to DE's inability to increase production. This should be met with a 30% combine capacity increase next year, as it has made a $35 million investment in its Illinois facility. I believe this will remedy its capacity issues going forward. In the second quarter it made a $90 investment in itslarge tractor facility in Iowa that will increase capacity by 25%.
DE's third quarter was quite good as it reported a net sales increase of 17%, while net income increased 7%, and diluted EPS was up 12% year over year for the quarter. Equipment operations sales were up approximately 18%. Forecasts for sales of the fourth quarter of this year will increase 29% year over year for the quarter. The full year will be up 21%, a percentage point higher than previously estimated.
From an agricultural standpoint, production tonnage from the 3rd quarter of 2007 increased 28%. Net sales were up 35% and operating profit increased 47%. Looking at crop prices, the Wall Street Journal shows that in January of 2002 soybeans were at a little over $4 a bushel, while corn was at $2 and wheat just under $3. Respectively, those prices have increased to approximately $14, $6 and $7.50 per bushel. It is estimated that we will have the second largest corn crop in history. This will take more combines and large tractors to harvest it. With that, Brazil is rapidly expanding its farmland at expense of the rainforest to grow more soybeans. This will continue to increase demand over the long haul.
Also, if we look at DE's estimate on commodity prices for 2008/2009 we see an increase in the value of all three commodities. If the prices continue to increase, even with the dollar beginning to rebound, it is easily determined that crops will continue to expand, harvests will continue to increase and machinery will be needed. This year's corn price estimate for the full year is $4.45/bushel and will increase to $5.50 next year. Wheat's estimate is $6.92 this year and $7.74 next. Soybeans are $10.60 this year, and $13.50 next. Respectively, these crops were just $3.04, $4.26, and $6.43 for last year.
This is why DE is forecasting agricultural equipment growth of 20%-25% for this year, up 5% in the last quarter for the US and Canada. South American sales were increased for this year to 40% up from 30%. Western Europe has increased to 5% from earlier estimates of 3-5%. Central Europe and Russian demand is increasingly rapidly but there are no growth estimates for these areas of the world. Worldwide net sales are estimated to be up 38% which is a 3 point increase over last quarters estimates for the year.
Looking at worldwide construction and consumer equipment, sales are down 1% year over year and costs will decrease profit by 28%. Even with this net sales should be up 4% for the year. Worldwide construction and forestry will see sales slip 7% and operating profit decrease by 38%. Net sales to be projected down 5% for the full year in this area of business. With respect to third quarter net sales construction and forestry, and construction and commercial accounted for $2.526 billion where agricultural net sales were $4.544 billion. This number shows that the weakness in the other two areas may have caused a bearishness that is too extreme as agricultural growth rates will offset this weakness until there is an improvement in this area.
To keep investors up to date on the importance of agricultural sales, in July, US and Canadian sales saw row tractors for the industry up 38%, while DE saw a much larger increase for that month by double digits more than the industry. Over that same period the industry saw 4WD tractor sales up 49%, while DE saw a bigger increase in sales by double digits again. Combine sales for DE were weaker than the industry but growth was at 31%. DE's combine and row-crop tractors inventorys decreased year over year. Western Europe sales for comines increased in the triple digits for DE and tractors increased in the single digits.
Lastly, looking at share repurchases and dividend increases, DE seems attractive. As of May 28th of this year authorization was made for $5 billion in stock repurchases. The dividend rate increased 12% payable August first of this year. Since 2004 DE has increased its annualized dividend rate by 155%. This shows the companies long term confidence that their stock price is low and that growth looks good going forward. It is estimated that as much as a third of the corn crop could go to ethanol production this year. If these plans stay on task, we could see large increases in crop prices for the next few years and increases in farm land throughout the world. With DE's worldwide, exposure it is a great play going forward.
Thursday, August 14, 2008
It's No Time to Plow Deere Under
Perhaps as much as any heavily global company you can think of, it's becoming more important to break Deere (NYSE: DE) into it its component parts for a real understanding of its current status and future prospects.
But before we do that, let's cast a quick glance in the direction of Deere's $575.2 million -- or $1.32-per-share -- profit for the quarter. Those figures were up about 7% on the net income line from the $537.2 million in the second quarter a year ago. Higher expectations for the period -- more along the lines of $1.36 per share -- resulted in the company's shares taking about a 3.2% hit amid Wednesday's triple-digit market tumble.
As you know from your sojourns down your neighborhood grocery isles, world agricultural prices continue their unceasing climb, leading in part to a 35% quarterly increase in global agricultural equipment sales at Deere. And even more impressive was the group's operating profit jump of 47%. Looking ahead, management expects to at least maintain its active agricultural pace, with about 38% sales growth for the year.
But lest you think everything is coming up roses -- or corn, or alfalfa -- at Deere, sales in the Commercial & Consumer sector dipped by a single percentage point, and its operating profit contribution slid by 28%, based on various types of headwinds, including higher materials costs. Beyond that, the Construction & Forestry unit saw its sales hit by 7% in the quarter, while its operating profit fell approximately 38%.
Clearly, along with other companies with strong agricultural businesses, such as chemicals manufacturer DuPont (NYSE: DD), and seed and fertilizer purveyors Monsanto (NYSE: MON), Mosaic (NYSE: MOS), and Potash Corp. of Saskatchewan (NYSE: POT), Deere is being carried nicely by its operations in this burgeoning sector.
Ag isn't Deere's only business, but with the agricultural sector still comprising almost 60% of Deere's total sales, and with ag-related sales expected to remain strong throughout much of the world, Deere clearly isn't a stock deserving of being plowed under.
But before we do that, let's cast a quick glance in the direction of Deere's $575.2 million -- or $1.32-per-share -- profit for the quarter. Those figures were up about 7% on the net income line from the $537.2 million in the second quarter a year ago. Higher expectations for the period -- more along the lines of $1.36 per share -- resulted in the company's shares taking about a 3.2% hit amid Wednesday's triple-digit market tumble.
As you know from your sojourns down your neighborhood grocery isles, world agricultural prices continue their unceasing climb, leading in part to a 35% quarterly increase in global agricultural equipment sales at Deere. And even more impressive was the group's operating profit jump of 47%. Looking ahead, management expects to at least maintain its active agricultural pace, with about 38% sales growth for the year.
But lest you think everything is coming up roses -- or corn, or alfalfa -- at Deere, sales in the Commercial & Consumer sector dipped by a single percentage point, and its operating profit contribution slid by 28%, based on various types of headwinds, including higher materials costs. Beyond that, the Construction & Forestry unit saw its sales hit by 7% in the quarter, while its operating profit fell approximately 38%.
Clearly, along with other companies with strong agricultural businesses, such as chemicals manufacturer DuPont (NYSE: DD), and seed and fertilizer purveyors Monsanto (NYSE: MON), Mosaic (NYSE: MOS), and Potash Corp. of Saskatchewan (NYSE: POT), Deere is being carried nicely by its operations in this burgeoning sector.
Ag isn't Deere's only business, but with the agricultural sector still comprising almost 60% of Deere's total sales, and with ag-related sales expected to remain strong throughout much of the world, Deere clearly isn't a stock deserving of being plowed under.
Deere in the Headlights
The farm-equipment giant gets punished by Wall Street after high raw material costs squeeze its profits. But by some measures the company's prospects couldn't be better
Rising commodity prices are a two-edged sword for Deere (DE), and on Aug. 13 the heavy machinery maker got sliced.
Shares of Deere at one point plummeted 12% after third-quarter results showed raw material costs eating into the company's profit margins.
Deere posted fiscal third-quarter earnings of $1.32 per share, up from $1.18 a year ago. Revenue rose 17%. Agricultural equipment sales rose 35%, while sales at Deere's other, smaller business units—commercial and consumer equipment, and construction and forestry—fell by single digits.
A 12% increase in profits is nothing to sneeze at. Wall Street, however, was expecting earnings of $1.36 per share.
One big reason for the shortfall was higher raw material costs. Freight and material costs for Deere rose $140 million from a year ago, and the firm expects those costs to jump $425 million to $475 million for the entire year.
But commodity cost increases aren't just hurting Deere—they're also helping.
Shopping for New Tractors
Farmers around the world are benefiting from higher crop prices, giving them more cash to buy up Deere's tractors and other agricultural equipment.
"Farm conditions remain quite strong throughout the world, driving our [agricultural] operations at an unprecedented level," Susan Karlix, Deere's manager of investor relations, told analysts on Aug. 13. "The big picture still looks good," she added.
While higher costs for steel and energy are hurting Deere, its customers love the higher prices their crops get at market.
Recently, the price of many commodities has fallen from record highs—including both crops and energy. But farmers are still doing well: Deere raised its 2008-09 forecasts for corn, wheat, soybeans, and cotton on Aug. 13. For example, corn is expected to be priced at $5.50 per bushel, up from $3.04 just two years before.
As a result, demand for agricultural equipment is booming. Deere raised those forecasts on Aug. 13 as well, with the industry's retail sales expected to rise 20 to 25% in the U.S. and Canada, and a 40% jump expected in South America.
Deere is investing heavily in places such as Brazil to meet the growing demand for its equipment.
Pricier Gear
Another benefit of growing demand and wealthier customers? Deere can raise prices to make up for its higher costs.
In fact, Karlix insisted that higher raw material costs were "a near-term issue." Deere plans to raise prices on its 2009 combines by 9% to 10.5%, she says. Higher prices should show up in earnings results in early 2009, she said.
Wachovia (WB) analyst Andrew Casey expects "most of the input cost issues to be behind" Deere beginning next year. "We would be buyers of the stock on weakness with a view toward [fiscal 2009] earnings growth re-acceleration," he wrote.
Despite this quarter's shortfall, "[agricultural] fundamentals and operating performance remain strong," wrote JPMorgan (JPM) analyst Ann Duignan.
Although Deere's earnings report rattled investors, by the end of trading on Aug. 13 shares had battled back. Deere shares closed above $67, down 3.3%.
That suggests at least some investors recognize that while higher costs are hurting Deere now, the company is poised to benefit from elevated commodity prices for years to come
Rising commodity prices are a two-edged sword for Deere (DE), and on Aug. 13 the heavy machinery maker got sliced.
Shares of Deere at one point plummeted 12% after third-quarter results showed raw material costs eating into the company's profit margins.
Deere posted fiscal third-quarter earnings of $1.32 per share, up from $1.18 a year ago. Revenue rose 17%. Agricultural equipment sales rose 35%, while sales at Deere's other, smaller business units—commercial and consumer equipment, and construction and forestry—fell by single digits.
A 12% increase in profits is nothing to sneeze at. Wall Street, however, was expecting earnings of $1.36 per share.
One big reason for the shortfall was higher raw material costs. Freight and material costs for Deere rose $140 million from a year ago, and the firm expects those costs to jump $425 million to $475 million for the entire year.
But commodity cost increases aren't just hurting Deere—they're also helping.
Shopping for New Tractors
Farmers around the world are benefiting from higher crop prices, giving them more cash to buy up Deere's tractors and other agricultural equipment.
"Farm conditions remain quite strong throughout the world, driving our [agricultural] operations at an unprecedented level," Susan Karlix, Deere's manager of investor relations, told analysts on Aug. 13. "The big picture still looks good," she added.
While higher costs for steel and energy are hurting Deere, its customers love the higher prices their crops get at market.
Recently, the price of many commodities has fallen from record highs—including both crops and energy. But farmers are still doing well: Deere raised its 2008-09 forecasts for corn, wheat, soybeans, and cotton on Aug. 13. For example, corn is expected to be priced at $5.50 per bushel, up from $3.04 just two years before.
As a result, demand for agricultural equipment is booming. Deere raised those forecasts on Aug. 13 as well, with the industry's retail sales expected to rise 20 to 25% in the U.S. and Canada, and a 40% jump expected in South America.
Deere is investing heavily in places such as Brazil to meet the growing demand for its equipment.
Pricier Gear
Another benefit of growing demand and wealthier customers? Deere can raise prices to make up for its higher costs.
In fact, Karlix insisted that higher raw material costs were "a near-term issue." Deere plans to raise prices on its 2009 combines by 9% to 10.5%, she says. Higher prices should show up in earnings results in early 2009, she said.
Wachovia (WB) analyst Andrew Casey expects "most of the input cost issues to be behind" Deere beginning next year. "We would be buyers of the stock on weakness with a view toward [fiscal 2009] earnings growth re-acceleration," he wrote.
Despite this quarter's shortfall, "[agricultural] fundamentals and operating performance remain strong," wrote JPMorgan (JPM) analyst Ann Duignan.
Although Deere's earnings report rattled investors, by the end of trading on Aug. 13 shares had battled back. Deere shares closed above $67, down 3.3%.
That suggests at least some investors recognize that while higher costs are hurting Deere now, the company is poised to benefit from elevated commodity prices for years to come
CF Industries Holdings, Inc
CF Industries Holdings, Inc. (NYSE: CF - News), one of North America's largest manufacturers and distributors of nitrogen and phosphate fertilizers, remains a Zacks #1 Rank (Strong Buy) despite the whiplash moves in its stock price in the last 2 weeks.
The company reported record second quarter earnings on July 28 which boosted the stock price to $167 by July 30. The company was also bullish about the rest of 2008 in its earnings report.
But a sell-off in the commodities sector, and most companies in commodities-related industries such as the fertilizers, drove the stock down to as low as $123.11 on Aug 12.
CF Industries Fundamentals Remain Strong
CF's recent stock plunge was not for the faint-of-heart but the roller coaster continues as it has again bounced to higher levels.
After this recent sell-off, CF remains an extremely cheap stock and its fundamentals remain in place. Basically, it has gone on sale. It's trading at only 6.24x its forward earnings. That's cheap even by industry standards which has a trailing P/E of 11.02.
Consensus Estimates Jump
Brokerage analysts continue to believe the fundamentals remain strong as well. Consensus estimates continue to rise on the company for both the third quarter and the full year.
In the last 30 days, third quarter estimates climbed 27% to $3.80 from $3.00 per share.
Full year estimates skyrocketed by 29% in the last month to $17.13 from $13.32. As an indicator of how quickly things are changing in the fertilizer sector, and how bullish the analyst outlook is, consensus estimates for full year 2009 have jumped 36.4% to $22.25 from $16.31 in just the last 90 days.
CF Continues To Surprise to the Upside
Despite earnings increases by analysts over the course of the prior quarters, CF continues to beat consensus estimates. The company surprised by 15.17% in the second quarter. That surprise came on the heels of 3 consecutive prior surprises. The company has beaten Wall Street estimates by an average of 28.73% the last four quarters.
Given the pricing power and profits in the fertilizer sector, CF has a tremendous return on equity (ROE). Its trailing 12 month ROE is 46.75%.
CF's stock is on roller coaster ride right now, but its earnings potential can't be beat.By Tracey Ryniec at Zacks
The company reported record second quarter earnings on July 28 which boosted the stock price to $167 by July 30. The company was also bullish about the rest of 2008 in its earnings report.
But a sell-off in the commodities sector, and most companies in commodities-related industries such as the fertilizers, drove the stock down to as low as $123.11 on Aug 12.
CF Industries Fundamentals Remain Strong
CF's recent stock plunge was not for the faint-of-heart but the roller coaster continues as it has again bounced to higher levels.
After this recent sell-off, CF remains an extremely cheap stock and its fundamentals remain in place. Basically, it has gone on sale. It's trading at only 6.24x its forward earnings. That's cheap even by industry standards which has a trailing P/E of 11.02.
Consensus Estimates Jump
Brokerage analysts continue to believe the fundamentals remain strong as well. Consensus estimates continue to rise on the company for both the third quarter and the full year.
In the last 30 days, third quarter estimates climbed 27% to $3.80 from $3.00 per share.
Full year estimates skyrocketed by 29% in the last month to $17.13 from $13.32. As an indicator of how quickly things are changing in the fertilizer sector, and how bullish the analyst outlook is, consensus estimates for full year 2009 have jumped 36.4% to $22.25 from $16.31 in just the last 90 days.
CF Continues To Surprise to the Upside
Despite earnings increases by analysts over the course of the prior quarters, CF continues to beat consensus estimates. The company surprised by 15.17% in the second quarter. That surprise came on the heels of 3 consecutive prior surprises. The company has beaten Wall Street estimates by an average of 28.73% the last four quarters.
Given the pricing power and profits in the fertilizer sector, CF has a tremendous return on equity (ROE). Its trailing 12 month ROE is 46.75%.
CF's stock is on roller coaster ride right now, but its earnings potential can't be beat.By Tracey Ryniec at Zacks
Intrepid Reports Results for Second Quarter 2008
DENVER--(BUSINESS WIRE)--Intrepid Potash, Inc. (NYSE:IPI - News) today announced second quarter 2008 results with pro forma net income of $32.4 million up from $4.0 million for the second quarter 2007.
Highlights for the Second Quarter:
Average net sales price for potash this quarter was $425 per short ton ($469 per metric tonne) compared to $182 per short ton ($201 per metric tonne) in the period a year ago.
Average net sales price for langbeinite this quarter was $188 per short ton ($207 per metric tonne) compared to $109 per short ton ($120 per metric tonne) in the second quarter 2007.
Potash production in the quarter was 210,000 short tons (190,000 metric tonnes), which was the same as the second quarter 2007.
Langbeinite production in the second quarter of 2008 was 58,000 short tons (53,000 metric tonnes), a 41 percent increase over the 41,000 short tons (37,000 metric tonnes) produced in the second quarter last year.
Gross margins in the second quarter for potash were $262 per short ton or 62 percent compared to 29 percent in the three months ended June 30, 2007. Gross margins for langbeinite were $81 per short ton or 43 percent up from 6 percent in the same period last year.
Pro forma net income per diluted share was $0.43 per share in the second quarter and $0.69 per diluted share for the first half of 2008 compared to $0.05 and $0.10 for the same periods in 2007.
Earning before interest, taxes, depreciation and amortization (EBITDA) was 572 percent higher in the second quarter of 2008 at $55.1 million compared to $8.2 million last year.
Capital projects are on schedule with $13 million invested this quarter.
“We are facing the first demand-driven agriculture market in modern times. The most recent USDA report indicates that yields will come in better than initially expected, yet still leave us with low levels of stocks. The increase in crop yield demonstrates the positive returns on the fertilizer investments made by the farming community and that fertilizers are doing their jobs,” said Bob Jornayvaz, Intrepid Potash’s CEO. “It is widely believed that a tight global food supply is a long-term situation and the demand for potash will continue to increase. Intrepid is focused on the long-term by appropriately and aggressively investing capital in new capacity and efficiency projects to bring on additional lower cost tons to satisfy the needs of our customers.”
Pro forma operating income for the second quarter of 2008 was $51.9 million and $78.4 million for the first half the year. Pro forma operating income was $6.7 million in the second quarter 2007 and $13.1 million for the six-month period ended June 30, 2007. Cash from operating activities was $68.9 million for the first half of 2008 compared to $21.8 for the same period in 2007. Our adjusted pro forma net income for the quarter ended June 30, 2008 was $31.6 million compared to $4.3 million in 2007. Increases in each of theses metrics has been driven by the strong demand in the market and the associated increase in pricing of potash and langbeinite.
Highlights for the Second Quarter:
Average net sales price for potash this quarter was $425 per short ton ($469 per metric tonne) compared to $182 per short ton ($201 per metric tonne) in the period a year ago.
Average net sales price for langbeinite this quarter was $188 per short ton ($207 per metric tonne) compared to $109 per short ton ($120 per metric tonne) in the second quarter 2007.
Potash production in the quarter was 210,000 short tons (190,000 metric tonnes), which was the same as the second quarter 2007.
Langbeinite production in the second quarter of 2008 was 58,000 short tons (53,000 metric tonnes), a 41 percent increase over the 41,000 short tons (37,000 metric tonnes) produced in the second quarter last year.
Gross margins in the second quarter for potash were $262 per short ton or 62 percent compared to 29 percent in the three months ended June 30, 2007. Gross margins for langbeinite were $81 per short ton or 43 percent up from 6 percent in the same period last year.
Pro forma net income per diluted share was $0.43 per share in the second quarter and $0.69 per diluted share for the first half of 2008 compared to $0.05 and $0.10 for the same periods in 2007.
Earning before interest, taxes, depreciation and amortization (EBITDA) was 572 percent higher in the second quarter of 2008 at $55.1 million compared to $8.2 million last year.
Capital projects are on schedule with $13 million invested this quarter.
“We are facing the first demand-driven agriculture market in modern times. The most recent USDA report indicates that yields will come in better than initially expected, yet still leave us with low levels of stocks. The increase in crop yield demonstrates the positive returns on the fertilizer investments made by the farming community and that fertilizers are doing their jobs,” said Bob Jornayvaz, Intrepid Potash’s CEO. “It is widely believed that a tight global food supply is a long-term situation and the demand for potash will continue to increase. Intrepid is focused on the long-term by appropriately and aggressively investing capital in new capacity and efficiency projects to bring on additional lower cost tons to satisfy the needs of our customers.”
Pro forma operating income for the second quarter of 2008 was $51.9 million and $78.4 million for the first half the year. Pro forma operating income was $6.7 million in the second quarter 2007 and $13.1 million for the six-month period ended June 30, 2007. Cash from operating activities was $68.9 million for the first half of 2008 compared to $21.8 for the same period in 2007. Our adjusted pro forma net income for the quarter ended June 30, 2008 was $31.6 million compared to $4.3 million in 2007. Increases in each of theses metrics has been driven by the strong demand in the market and the associated increase in pricing of potash and langbeinite.
Wednesday, August 13, 2008
Deere Ag Sales Not Enough
Though agricultural equipment sales for Deere & Co. (NYSE: DE - News) were up 35 percent in the quarter based on a strong domestic ag industry, the company reported earnings for its July-ended Q308 5 cents lower than its estimate per share: $1.32, whereas the Zacks consensus was $1.37. This number had not been augmented by analysts in any significant way in the past quarter, but marks the second-consecutive earnings miss for the company.
Shares were punished on the news this morning. As of mid-day, DE is off over 7 percent, or roughly $5 per share. Before the announcement, Deere held a Zacks Rank #3 (Hold) with a target price just over $74. Currently, the shares are trading in the $64 range.
Analysts are expecting fiscal Q4 earnings of $1.15 per share and fiscal 2008 (ending October) earnings of $5.08. Though the shares have succumbed to near-term pressure in today's market, it remains to be seen if analysts will aggressively ramp down expectations for the rest of the fiscal year.
Shares were punished on the news this morning. As of mid-day, DE is off over 7 percent, or roughly $5 per share. Before the announcement, Deere held a Zacks Rank #3 (Hold) with a target price just over $74. Currently, the shares are trading in the $64 range.
Analysts are expecting fiscal Q4 earnings of $1.15 per share and fiscal 2008 (ending October) earnings of $5.08. Though the shares have succumbed to near-term pressure in today's market, it remains to be seen if analysts will aggressively ramp down expectations for the rest of the fiscal year.
Inflation Bites Into Deere
Deere's tractors and other farm machinery are selling like hotcakes, but the inflationary pressures that are boosting prices for its customers are also raising prices at it suppliers. Net result: narrowing profit margins.
Farm machinery maker Deere (nyse: DE - news - people ) upped its 2008 sales guidance on Wednesday as it posted lower-than-expected third-quarter earnings. The firm said that earnings in the three months through July 31 were hurt by high raw-material costs that would also sting in its fourth quarter.
Deere plunged 11.8%, or $8.19, to $61.28, as investors fretted about the recent miss. It dragged down rival Caterpillar (nyse: CAT - news - people ) by 3.9%, or $2.78, to $69.02, and smaller AGCO (nyse: AG - news - people ) also fell 4.4%, or $2.51, to $54.42, during morning trading in New York.
Earnings in the company's fiscal third quarter rose 7.0%, to $575.2 million, or $1.32 a share, up from $537.2 million, or $1.18 a share, during the same period last year. But analysts on average expected Deere to earn $1.36 per share.
Moline, Illinois-based Deere increased its fourth-quarter sales outlook to a 29.0% gain year-over-year, implying sales of $8.6 billion from the $6.6 billion previously expected and well above Wall Street expectations. Earnings guidance, however, remained flat, at $425.0 million.
Business has been booming for Deere and other farm-equipment manufacturers as commodity prices skyrocket and farmers scramble to boost crop yields. But the commodities boom has started to bite into Deere's bottom line, since it uses a lot of metal in its products, though company leadership is taking it in stride.
Chief Executive Robert W. Lane said that agricultural commodity prices had "moderated" and "remain quite favorable by historical standards and are continuing to provide strong support to farm incomes and to the sale of productive farm machinery worldwide."
On May 14, Deere said second-quarter income jumped 22.4% and sales rose 17.4% but the company's guidance for 20.0% sales growth in the third quarter seemed conservative to analysts and investors given the backdrop of soaring demand and high crop prices (See: Steel Kills Deere). Animal-feed companies, developing markets' emerging middle class and ethanol companies have helped push prices for corn, rice and wheat to new highs
Farm machinery maker Deere (nyse: DE - news - people ) upped its 2008 sales guidance on Wednesday as it posted lower-than-expected third-quarter earnings. The firm said that earnings in the three months through July 31 were hurt by high raw-material costs that would also sting in its fourth quarter.
Deere plunged 11.8%, or $8.19, to $61.28, as investors fretted about the recent miss. It dragged down rival Caterpillar (nyse: CAT - news - people ) by 3.9%, or $2.78, to $69.02, and smaller AGCO (nyse: AG - news - people ) also fell 4.4%, or $2.51, to $54.42, during morning trading in New York.
Earnings in the company's fiscal third quarter rose 7.0%, to $575.2 million, or $1.32 a share, up from $537.2 million, or $1.18 a share, during the same period last year. But analysts on average expected Deere to earn $1.36 per share.
Moline, Illinois-based Deere increased its fourth-quarter sales outlook to a 29.0% gain year-over-year, implying sales of $8.6 billion from the $6.6 billion previously expected and well above Wall Street expectations. Earnings guidance, however, remained flat, at $425.0 million.
Business has been booming for Deere and other farm-equipment manufacturers as commodity prices skyrocket and farmers scramble to boost crop yields. But the commodities boom has started to bite into Deere's bottom line, since it uses a lot of metal in its products, though company leadership is taking it in stride.
Chief Executive Robert W. Lane said that agricultural commodity prices had "moderated" and "remain quite favorable by historical standards and are continuing to provide strong support to farm incomes and to the sale of productive farm machinery worldwide."
On May 14, Deere said second-quarter income jumped 22.4% and sales rose 17.4% but the company's guidance for 20.0% sales growth in the third quarter seemed conservative to analysts and investors given the backdrop of soaring demand and high crop prices (See: Steel Kills Deere). Animal-feed companies, developing markets' emerging middle class and ethanol companies have helped push prices for corn, rice and wheat to new highs
The Commodity Comeback: Sooner Than You Think
Since the hedge funds dropped commodities in early July, you have seen a dramatic sell-off in oil, coal, and fertilizers. This despite the fact that these commodities have excellent fundamentals going forward, stellar earnings, and continued demand.
The recent "rally" on Wall Street, with the illusion that with lower oil everything is right with the world, came to a reality check Tuesday when JPMorgan (JPM) reported a loss of 1.5 billion. What the market fails to accept is that the financial crisis is still in the middle innings and as long as the credit crunch, credit card defaults, mortgage crisis, and lower consumer spending continues, this crisis will not go away simply because oil is down in price.
This crisis has been years in the making. The continued budget deficits, a war in Iraq, complete disregard for oil alternatives, and a weak dollar created a financial credit crisis not seen since the great depression. But Wall Street, acting in a world where expectations are counted in minutes and not in years continues to assume that the financial crisis is over or will be over by a positive stimulation such as lower oil prices. This is not only an illusion but a complete denial of what is yet to come.
So where do you invest? Opportunities are limited and the game today is played in a field that changes quickly. No sector is bullet-proof. Not even to those that boasted that Visa (V) is depression-proof and its price is not affected by a bear market.
The one thing I believe in is that commodities are a stellar play now and in the future. I believe in this so much that the recent pull-back in commodities does not scare me one bit. I truly believe that the forces that led to the boom in commodities earlier this year will continue into the future. Demand for oil, coal, fertilizers, and other commodities in a world fighting for depleting natural resources will only make the fundamentals of these commodities stronger for a few more years to come.
Yes, there is great volatility. Yes, there will always be pull-backs. But do any here really believe that the dollar is coming back strong to stay? Do any here believe that the price of oil will go down further and stay at low levels? Or that the demand for fertilizers will be lowered?
There will be a prolonged bubble in the commodities sector eventually. And when that comes it will be bloody and very painful. But all indicators point to the fact that in this game we are only in the second inning. Those that see the opportunities in commodities and act on the cycles will be richly rewarded..seeking alpha
The recent "rally" on Wall Street, with the illusion that with lower oil everything is right with the world, came to a reality check Tuesday when JPMorgan (JPM) reported a loss of 1.5 billion. What the market fails to accept is that the financial crisis is still in the middle innings and as long as the credit crunch, credit card defaults, mortgage crisis, and lower consumer spending continues, this crisis will not go away simply because oil is down in price.
This crisis has been years in the making. The continued budget deficits, a war in Iraq, complete disregard for oil alternatives, and a weak dollar created a financial credit crisis not seen since the great depression. But Wall Street, acting in a world where expectations are counted in minutes and not in years continues to assume that the financial crisis is over or will be over by a positive stimulation such as lower oil prices. This is not only an illusion but a complete denial of what is yet to come.
So where do you invest? Opportunities are limited and the game today is played in a field that changes quickly. No sector is bullet-proof. Not even to those that boasted that Visa (V) is depression-proof and its price is not affected by a bear market.
The one thing I believe in is that commodities are a stellar play now and in the future. I believe in this so much that the recent pull-back in commodities does not scare me one bit. I truly believe that the forces that led to the boom in commodities earlier this year will continue into the future. Demand for oil, coal, fertilizers, and other commodities in a world fighting for depleting natural resources will only make the fundamentals of these commodities stronger for a few more years to come.
Yes, there is great volatility. Yes, there will always be pull-backs. But do any here really believe that the dollar is coming back strong to stay? Do any here believe that the price of oil will go down further and stay at low levels? Or that the demand for fertilizers will be lowered?
There will be a prolonged bubble in the commodities sector eventually. And when that comes it will be bloody and very painful. But all indicators point to the fact that in this game we are only in the second inning. Those that see the opportunities in commodities and act on the cycles will be richly rewarded..seeking alpha
Tuesday, August 12, 2008
CORN PRICES EASE AS USDA TEMPERS FLOOD IMPACT
It turns out that the June flooding across the Midwest that helped send agricultural commodity prices to record levels gave way to ideal weather for farming, limiting the hit that crops are going to take from the burst of deadly weather. That’s served as a rare blast of welcome air for beleagured stocks of fertilizer makers, which have gone from dizzying heights to thumping lows in the two tumultuous months since parts of the country got socked with torrential rain. According to the government’s department of agriculture, U.S. farmers will produce nearly 12.3 billion bushels of corn this year, some 5% above the rates forecast last month. The government said that the June flooding gave way to remarkably accommodating growing weather across ravaged parts of U.S. farmland. That helped virtually erase the fallout from the floods themselves, which damaged nearly 40% of cropland; the corn production is expected to represent the second-largest harvest on record. Yields, a key factor in agriculture products futures pricing, are expected to rise to 155 bushels per acre from last month’s estimate of 148 bushels; corn prices sagged nearly $2 from well over $7 at June’s records, falling to $5.55 recently. Shares of Mosiac (MOS), which sank as much as 41% from the June highs, have advanced nearly 4% Tuesday. Potash (POT) and Agrium (AGU) - both of which lost one-third of their market values in the two months since topping out in June - have increased 3% Tuesday.
Monsanto (MON) wasn’t hit quite as hard as its peers, falling about 25% from the June highs through Monday’s close. The agricultural nutrients concern said Tuesday it expected to see 2009 profits from its corn products increase as much as 30%, and that over the next four years, it expected to launch what it described as several new game-changing technologies in its nutrients product lines. That should allow the company to continue to stretch what has been an eight-year period in which it has boosted its share of the corn-products market. Monsanto rose 4% Tuesday.
Monsanto (MON) wasn’t hit quite as hard as its peers, falling about 25% from the June highs through Monday’s close. The agricultural nutrients concern said Tuesday it expected to see 2009 profits from its corn products increase as much as 30%, and that over the next four years, it expected to launch what it described as several new game-changing technologies in its nutrients product lines. That should allow the company to continue to stretch what has been an eight-year period in which it has boosted its share of the corn-products market. Monsanto rose 4% Tuesday.
Sunday, August 10, 2008
PotashCorp.: Sitting on the Long-Term Trendline
I've been seeing a lot of people concerned about the action in the agriculture sector, namely fertilizer stocks. I just wanted to post and say that while yes, there is some concerning action in those stocks, the long-term trendline is still in tact. And, that's all I'm concerned about. We all know these companies are still firing on all cylinders, as evidenced by the blowout quarters they just reported. The market, though, likes to sell off anything remotely commodity related - that's just how it is. As Lawrence so effectively pointed out - until the long-term uptrend is broken, these stocks are still manageable.
We are currently right around the long-term trendline. You can buy around $168/169 and then stop out around $165 if you want a tight stop or $159 if you want a less conservative stop. These fertilizer names are on the verge of a major technical breakdown. In addition, although we love their story fundamentally... you have to adhere to the price action we're seeing.
We are currently right around the long-term trendline. You can buy around $168/169 and then stop out around $165 if you want a tight stop or $159 if you want a less conservative stop. These fertilizer names are on the verge of a major technical breakdown. In addition, although we love their story fundamentally... you have to adhere to the price action we're seeing.
Potash Corp.: Senior Exec Increases Holdings as Stock Drops
When Potash Corp. of Saskatchewan (POT) saw its shares fall as much as 15% on Tuesday, some saw it as an accurate reflection of the slowing world economy and the bearish impact this has on commodities and the companies that produce them. But others saw it as an opportunity, driving names like Agrium Inc. (AGU) and Potash Corp. to quickly make up some of their steep losses.
One person that appears to have seen an opportunty in the Potash Corp. sell-off is Garth Moore, president of the company’s PCS Potash division. He bought 3,000 company shares on Tuesday for C$175.51 a piece, just off the intra-day low. He later bought another 2,000 Potash Corp. shares for prices as high as C$180.67 to bring his company holdings to 24,800 shares.
Other than the company’s own buyback program, which a filing on Wednesday showed that 1,683,100 shares were repurchased and canceled at the end of July, company insiders haven’t been doing much of note. But maybe a sell-off for a stock that is up roughly 100% in the past 12 months is just the motivation it needed.
One person that appears to have seen an opportunty in the Potash Corp. sell-off is Garth Moore, president of the company’s PCS Potash division. He bought 3,000 company shares on Tuesday for C$175.51 a piece, just off the intra-day low. He later bought another 2,000 Potash Corp. shares for prices as high as C$180.67 to bring his company holdings to 24,800 shares.
Other than the company’s own buyback program, which a filing on Wednesday showed that 1,683,100 shares were repurchased and canceled at the end of July, company insiders haven’t been doing much of note. But maybe a sell-off for a stock that is up roughly 100% in the past 12 months is just the motivation it needed.
Portfolio Investor: Clark on Commodities
Is MOO a good bargain now?
Clark: We're not a buyer yet. We'll be ready to probably make a move in it around the end of the third quarter or early into the fourth quarter. We'd like to see MOO, along with DBA, find a base and stop falling. When you pull up the technical charts, both are continuing to fall. By contrast, Brazil is already finding some support. We know that through the iShares MSCI Brazil Index (EWZ). Technically, it seems to have found a base around $75 per share. MOO and DBA have not yet.
Clark: We're not a buyer yet. We'll be ready to probably make a move in it around the end of the third quarter or early into the fourth quarter. We'd like to see MOO, along with DBA, find a base and stop falling. When you pull up the technical charts, both are continuing to fall. By contrast, Brazil is already finding some support. We know that through the iShares MSCI Brazil Index (EWZ). Technically, it seems to have found a base around $75 per share. MOO and DBA have not yet.
Friday, August 8, 2008
Agrium a Buy with $100 Target
In the second quarter, Agrium Inc. (NYSE: AGU - News) reported diluted earnings per share of $4.00, more than double from $1.70 in the same quarter of the previous year. The recently completed United Agri-Products (UAP) acquisition is estimated to have contributed $0.70 diluted earnings per share for the reported period of May 5 to June 30.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has significant free cash flow. Therefore, we rate the shares a Buy with a target of $100.00.
After the acquisition of UAP, the company's market share increased to 16% in the retail business. The company expects good growth in the seed sales and crop protection chemicals business in 2008 because the UAP acquisition has expanded the depth and breadth of its product line. The company expects annual synergies of approximately $18 million, $80 million and $115 million from 2008 to 2010.
Recently, Agrium concluded the acquisition of 70% interest in Common Market Fertilizers S.A. (CMF), one of Western Europe's largest fertilizer distribution companies. This acquisition is expected to increase the company s purchase-for-resale business by almost 2.5 million tons on an annual basis.
Further, the company plans to expand its retail operations in South America through organic growth and greenfield expansion. It has already identified six sites for expansion in 2008 and 2009. Due to tight supply and strong demand in the ammonia business, the company restarted its smaller Redwater #1 ammonia plant late in the first quarter of 2008..zacks.com
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has significant free cash flow. Therefore, we rate the shares a Buy with a target of $100.00.
After the acquisition of UAP, the company's market share increased to 16% in the retail business. The company expects good growth in the seed sales and crop protection chemicals business in 2008 because the UAP acquisition has expanded the depth and breadth of its product line. The company expects annual synergies of approximately $18 million, $80 million and $115 million from 2008 to 2010.
Recently, Agrium concluded the acquisition of 70% interest in Common Market Fertilizers S.A. (CMF), one of Western Europe's largest fertilizer distribution companies. This acquisition is expected to increase the company s purchase-for-resale business by almost 2.5 million tons on an annual basis.
Further, the company plans to expand its retail operations in South America through organic growth and greenfield expansion. It has already identified six sites for expansion in 2008 and 2009. Due to tight supply and strong demand in the ammonia business, the company restarted its smaller Redwater #1 ammonia plant late in the first quarter of 2008..zacks.com
World's Breadbasket Creates Record Earnings for the Fertilizers
Global Food Demand is On the Rise
Global demand for food continues to increase as the emerging market countries change diet and are eating more beef. The beef demand has increased grain demand, which is needed in order to feed the cattle. Agriculture commodity prices have skyrocketed in 2008 as demand has soared.
Behind the farming scene is a little known industry called the fertilizers, which supply the building blocks to farmers around the world who use fertilizers to increase crop size and health.
As prices rise for wheat, soybeans, or corn, farmers are eager to plant more crops in order to cash in on the price increases. Farmers then invest in more fertilizer to increase their crop size.
Fertilizers See Earnings Soar in the Last Six Months
Many of the major fertilizer companies have recently reported quarterly earnings and they have been fantastic.
Terra Industries, Inc. (TRA), which produces nitrogen fertilizers, saw revenues nearly triple to a record $202.2 million from $69.4 million.
The Mosaic Company (MOS), a producer of phosphates and potash fertilizers, quadrupled profits when it reported fourth quarter earnings on July 28 to $862.5 million from $202.6 million.
The story was more of the same at Agrium, Inc. (AGU), the nitrogen and potash fertilizer and agricultural products manufacturer. Agrium doubled its earnings in the second quarter to a record of $636 million from $229 million a year ago.
Companies Foresee a Bright Future
Across the board, the fertilizer group is saying that the rest of 2008 looks strong for the industry.
Terra Industries said it anticipates strong demand for the remainder of 2008 as customers fill their storage capacity in anticipation of a robust spring 2009 planting and application season. In the nitrogen market, tight global supply/demand balance continues to put upward pressure on pricing.
Global demand for food continues to grow and with it grows fertilizer demand. Mosaic said that fertilizer growth is projected to grow at double the rate of the last 10 years. The company was bullish in its fourth quarter earnings report, saying that the fundamental driver of its business, the need for more food, continues unabated.
Agrium continued the chorus in its second quarter earnings statement. It saw continued strong demand for its products as corn, wheat and soybean prices remain at two to three times historic levels. AGU believes these levels should support crop input demand and continued fertilizer strength.
What Dangers Lurk Beneath the Surface?
Because the fertilizer industry is so dependent on the amount of planting and application by farmers, prices of corn, soybeans and wheat remain at the forefront of forecasting future fertilizer demand.
As Agrium remarked, global crop production will likely remain high as long as prices of corn, soybeans and wheat remain above historical norms. Obviously, a whole scale crash in commodity prices would have a negative impact on the fertilizer industry.
Higher production of fertilizers, especially potash, could also have a negative effect by driving down potash prices, which have been soaring in 2008.
According to Agrium, North American potash inventories have tightened significantly over the past couple of months. The Fertilizer Institute reported levels at the end of June that were 30% lower than the same time in 2007. Inventories are also 41% less than the 5-year average.
However, it's difficult for the fertilizer industry to increase production given the significant start-up costs and time delay in bringing a new potash mine on-line.
Consensus Estimates Are Rising
Consensus estimates have been rising in the last 30 days on both Mosaic and Terra Industries.
Estimates rose on MOS for both the first quarter 2009 and the full year 2009. For the first quarter, estimates rose to $2.92 from $2.80. For the full year, estimates gained 68 cents to $13.62 from $12.94. 90 days ago analysts were calling for $11.99.
For TRA, third quarter estimates gained 5 cents to $1.14 from $1.09 per share. For the full year, estimates rose to $4.67 from $4.59 per share.
MOS, TRA and AGU are Zacks #1 Rank (Strong Buy) stocks. All three are classified in Fertilizers. This group contains 8 companies, including several other Zacks #1 Rank stocks: CF Industries Holdings, Inc. (CF), Potash of Saskatchewan (POT) and Intrepid Potash, Inc. (IPI). Intrepid Potash is scheduled to report earnings on Aug 14.
It also includes two Zacks #3 Rank (Hold) stocks: China Agritech (CAGC) and Yara International (YARIY).
Global demand for food continues to increase as the emerging market countries change diet and are eating more beef. The beef demand has increased grain demand, which is needed in order to feed the cattle. Agriculture commodity prices have skyrocketed in 2008 as demand has soared.
Behind the farming scene is a little known industry called the fertilizers, which supply the building blocks to farmers around the world who use fertilizers to increase crop size and health.
As prices rise for wheat, soybeans, or corn, farmers are eager to plant more crops in order to cash in on the price increases. Farmers then invest in more fertilizer to increase their crop size.
Fertilizers See Earnings Soar in the Last Six Months
Many of the major fertilizer companies have recently reported quarterly earnings and they have been fantastic.
Terra Industries, Inc. (TRA), which produces nitrogen fertilizers, saw revenues nearly triple to a record $202.2 million from $69.4 million.
The Mosaic Company (MOS), a producer of phosphates and potash fertilizers, quadrupled profits when it reported fourth quarter earnings on July 28 to $862.5 million from $202.6 million.
The story was more of the same at Agrium, Inc. (AGU), the nitrogen and potash fertilizer and agricultural products manufacturer. Agrium doubled its earnings in the second quarter to a record of $636 million from $229 million a year ago.
Companies Foresee a Bright Future
Across the board, the fertilizer group is saying that the rest of 2008 looks strong for the industry.
Terra Industries said it anticipates strong demand for the remainder of 2008 as customers fill their storage capacity in anticipation of a robust spring 2009 planting and application season. In the nitrogen market, tight global supply/demand balance continues to put upward pressure on pricing.
Global demand for food continues to grow and with it grows fertilizer demand. Mosaic said that fertilizer growth is projected to grow at double the rate of the last 10 years. The company was bullish in its fourth quarter earnings report, saying that the fundamental driver of its business, the need for more food, continues unabated.
Agrium continued the chorus in its second quarter earnings statement. It saw continued strong demand for its products as corn, wheat and soybean prices remain at two to three times historic levels. AGU believes these levels should support crop input demand and continued fertilizer strength.
What Dangers Lurk Beneath the Surface?
Because the fertilizer industry is so dependent on the amount of planting and application by farmers, prices of corn, soybeans and wheat remain at the forefront of forecasting future fertilizer demand.
As Agrium remarked, global crop production will likely remain high as long as prices of corn, soybeans and wheat remain above historical norms. Obviously, a whole scale crash in commodity prices would have a negative impact on the fertilizer industry.
Higher production of fertilizers, especially potash, could also have a negative effect by driving down potash prices, which have been soaring in 2008.
According to Agrium, North American potash inventories have tightened significantly over the past couple of months. The Fertilizer Institute reported levels at the end of June that were 30% lower than the same time in 2007. Inventories are also 41% less than the 5-year average.
However, it's difficult for the fertilizer industry to increase production given the significant start-up costs and time delay in bringing a new potash mine on-line.
Consensus Estimates Are Rising
Consensus estimates have been rising in the last 30 days on both Mosaic and Terra Industries.
Estimates rose on MOS for both the first quarter 2009 and the full year 2009. For the first quarter, estimates rose to $2.92 from $2.80. For the full year, estimates gained 68 cents to $13.62 from $12.94. 90 days ago analysts were calling for $11.99.
For TRA, third quarter estimates gained 5 cents to $1.14 from $1.09 per share. For the full year, estimates rose to $4.67 from $4.59 per share.
MOS, TRA and AGU are Zacks #1 Rank (Strong Buy) stocks. All three are classified in Fertilizers. This group contains 8 companies, including several other Zacks #1 Rank stocks: CF Industries Holdings, Inc. (CF), Potash of Saskatchewan (POT) and Intrepid Potash, Inc. (IPI). Intrepid Potash is scheduled to report earnings on Aug 14.
It also includes two Zacks #3 Rank (Hold) stocks: China Agritech (CAGC) and Yara International (YARIY).
Thursday, August 7, 2008
Cramer : Buy Deere here
On The Street TV
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=9170990&src=finance&ch=633473
http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=9170990&src=finance&ch=633473
Wednesday, August 6, 2008
Agrium Blows Out Earnings, Offers Bullish Outlook
Agrium(AGU) just reported a huge beat in its latest quarter. Earnings per share came in 85 cents ahead of consensus estimates. Revenue was up 90%, as demand its products and services skyrocketed once again.
Management is bullish on the rest of the year, but that is based on prices for corn, wheat and soybean prices remaining at historic levels. The downward movement in those commodities lately may not support such a positive outlook. We have recently removed names like Mosaic(MOS - Cramer's Take - Stockpickr) and Potash(POT - Cramer's Take - Stockpickr) from our "Recommended" list, as there is too much "hot money" that may hammer those stocks.
We are still recommending Agrium, but we would not be adding to shares at their current level. If the stock falls a bit further, we may decide to downgrade the stock. Unfortunately, some dividend stocks become momentum trading vehicles, and that alters what our usual holding period may be -- that's something to consider if you are looking to buy and hold for a specific period of time. .at thestreet.com
Management is bullish on the rest of the year, but that is based on prices for corn, wheat and soybean prices remaining at historic levels. The downward movement in those commodities lately may not support such a positive outlook. We have recently removed names like Mosaic(MOS - Cramer's Take - Stockpickr) and Potash(POT - Cramer's Take - Stockpickr) from our "Recommended" list, as there is too much "hot money" that may hammer those stocks.
We are still recommending Agrium, but we would not be adding to shares at their current level. If the stock falls a bit further, we may decide to downgrade the stock. Unfortunately, some dividend stocks become momentum trading vehicles, and that alters what our usual holding period may be -- that's something to consider if you are looking to buy and hold for a specific period of time. .at thestreet.com
Agrium Tops, Monsanto Divests
Fertilizer maker Agrium's (NYSE:AGU - News) Q2 EPS rose 135% to $4, beating views by 85 cents. Sales grew 90% to $3.87 bil, above views. Agrium cited gains across all units, especially its newly acquired UAP business. Also, seed giant Monsanto (NYSE:MON - News) aims to sell its dairy hormone business amid criticism and safety concerns about growth hormone. Agrium shares rose 5%; Monsanto gained 2% today.
Agrium's Cream-Of-The-Crop Quarter
Agricultural nutrients and products company Agrium said earnings took off during the second quarter, as the company raised fertilizer prices in accordance with soaring commodity prices.
Agrium (nyse: AGU - news - people ) shares added 6.0%, or $4.80, to $84.45 during Wednesday's afternoon trading session as president Mike Wilson forecast continued growth across all product lines despite a recent downturn in commodity prices. Corn prices have plunged 33.0%--taking Agrium's stock price with it--since Midwestern flooding fed fears of a meager harvest, increasing pressure on global food supply. (See " Corn's Comeback, Thanks To Mother Nature.")
Richard Downey, Agrium's senior director of investor relations, said it's ironic that investors are worried about fallen crop prices since they're down from unprecedented peaks reached while floods soaked the Midwest. "Regardless of recent crop price declines from record highs, nutrient prices remain very strong and supply remains tight," Downey said.
According to the company's second-quarter report, crop prices remain two to three times higher than historic levels. "Given that global and U.S. grain inventories remain very tight, grain prices will continue to reflect growing conditions and yield potential for both U.S. and global crop production," Agrium said, citing a June report from the U.S. Department of Agriculture, which anticipates global grain and oilseed stockpiles to scrape 35-year lows through 2009.
"We've always maintained we don't need and do not require $8 [per bushel] corn price to support the strong global nutrient demand," Wilson said during Wednesday's conference call with analysts.
Agrium's net earnings more than doubled to $636.0 million, or $4 a share, from $229.0 million, or $1.70 a share. Earnings, adjusted to exclude hedging gains and compensation expenses, were $3.81 a share, beating analysts' estimates for earnings of $3.15 a share. Sales rose 90.3% to $3.8 billion from $2.0 billion, helped by both improved volume and higher selling prices. Analysts expected sales of $3.5 billion.
The company will follow what it did last year and provide earnings guidance for the second half of 2008 when it announces third-quarter earnings.
Agrium (nyse: AGU - news - people ) shares added 6.0%, or $4.80, to $84.45 during Wednesday's afternoon trading session as president Mike Wilson forecast continued growth across all product lines despite a recent downturn in commodity prices. Corn prices have plunged 33.0%--taking Agrium's stock price with it--since Midwestern flooding fed fears of a meager harvest, increasing pressure on global food supply. (See " Corn's Comeback, Thanks To Mother Nature.")
Richard Downey, Agrium's senior director of investor relations, said it's ironic that investors are worried about fallen crop prices since they're down from unprecedented peaks reached while floods soaked the Midwest. "Regardless of recent crop price declines from record highs, nutrient prices remain very strong and supply remains tight," Downey said.
According to the company's second-quarter report, crop prices remain two to three times higher than historic levels. "Given that global and U.S. grain inventories remain very tight, grain prices will continue to reflect growing conditions and yield potential for both U.S. and global crop production," Agrium said, citing a June report from the U.S. Department of Agriculture, which anticipates global grain and oilseed stockpiles to scrape 35-year lows through 2009.
"We've always maintained we don't need and do not require $8 [per bushel] corn price to support the strong global nutrient demand," Wilson said during Wednesday's conference call with analysts.
Agrium's net earnings more than doubled to $636.0 million, or $4 a share, from $229.0 million, or $1.70 a share. Earnings, adjusted to exclude hedging gains and compensation expenses, were $3.81 a share, beating analysts' estimates for earnings of $3.15 a share. Sales rose 90.3% to $3.8 billion from $2.0 billion, helped by both improved volume and higher selling prices. Analysts expected sales of $3.5 billion.
The company will follow what it did last year and provide earnings guidance for the second half of 2008 when it announces third-quarter earnings.
Tuesday, August 5, 2008
Egypt shelves deal with Agrium
Egypt shelves Agrium deal for a $280 million investment in fertilizer plant
CAIRO, Egypt (AP) -- Egypt says it has canceled a deal with the Canadian company Agrium Inc. to invest $280 million in a fertilizer plant on the Nile delta.
A Cabinet statement issued Tuesday says the deal was shelved because of "civic" opposition -- a reference to street protests over environmental hazards.
Egypt's parliament has also voted to move the $1.2 billion nitrogen products plant, which is already under construction.
Agrium has said it may have to write off its investment. Tuesday's Cabinet statement says a government-owned company will arrange a buyout.
U.S. shares of the company fell 20 cents to $79.35 in midday trading.
CAIRO, Egypt (AP) -- Egypt says it has canceled a deal with the Canadian company Agrium Inc. to invest $280 million in a fertilizer plant on the Nile delta.
A Cabinet statement issued Tuesday says the deal was shelved because of "civic" opposition -- a reference to street protests over environmental hazards.
Egypt's parliament has also voted to move the $1.2 billion nitrogen products plant, which is already under construction.
Agrium has said it may have to write off its investment. Tuesday's Cabinet statement says a government-owned company will arrange a buyout.
U.S. shares of the company fell 20 cents to $79.35 in midday trading.
Potash Corp: Dynamics of Supply and Demand Drive Earnings Growth
The stock of Potash Corp. (POT) has experienced a huge sell-off lately due to decline of agriculture commodities prices, profit taking, concerns on the possible change of policy on ethanol after the election, etc.
Yet I think many investors overreacted to the situation. Please see my analysis below.
With the largest fertilizers manufacturing capacity, Potash Corp. provides farmers around the world with the three primary plant nutrients – potash, nitrogen and phosphate, enabling the farmers to enrich the soil and improve yields. It is the largest potash producer, the second largest producer of nitrogen and the third largest producer of phosphate in the world. We expect Potash Corp. to continue to deliver quality earnings in the coming years.
"Skewed" Supply-Demand Dynamics
The demand for potash has been very strong worldwide.
In China, due to the massive industrialization and urbanization, especially, the rapid development in its agriculture, the demand for potash has increased from 2 million ton to 10 million ton per annum over the last decade. China has been one of the largest importers of potash from the consortium lately, buying almost one third of the output from Potash Corp.. Among the major three elements of fertilizer, nitrogen, phosphate and potash, China is self-sufficient with the former two, and in 2007 China turned itself from a phosphate importer to a phosphate exporter.
Potash is the only element that China has to heavily rely on imports, since the potassium resource is severely scarce in China. Every year, China has to import about 70% of potassium fertilizer products and 2007 alone purchased 9.414 million ton from abroad, an increase of 33.5% compared to the amount of import of potassium products in 2006.
At the Conference of the International Fertilizer Industry Association [IFA] held in May this year in Vienna, Chinese representatives expressed interest in expanding cooperation with the major potash exporters. Note that this took place after the stunning increase in potash import price for China in April 2008. Challenged by the strong demand of potash, China has no choice but accepts the skyrocketing prices for imported potash.
Thailand, a major agriculture economy in Asia, heavily relies on chemical fertilizers to improve productivity. Yet nearly all chemical fertilizers and raw materials for fertilizer mixing must be imported since necessary raw materials for manufacturing chemical fertilizers can not be found on domestic land. Although lack of raw materials for chemical fertilizer subjects the country to the world market price fluctuation, the government of Thailand controls the prices of chemical fertilizer sold to its farmers, and has to provide subsidy if necessary.
Brazil is the third largest importer of potash, consuming about 15% of the global potash market and growing at 11% per year. (China and US are the largest market for potash, consuming 21% and 18% respectively.) As the largest ethanol producer in the world and with a major agriculture economy, Brazil has an insatiable demand for fertilizers to grow corn, soybeans, sugarcane and other agriculture commodities. The trend seems showing little change. It is reported that the demand for potash fertilizer has been unusually strong in the first quarter of this year, and expected to have its highest agricultural income ever in 2008, reaching $84.2 billion, an increase of 14% over 2007 according to the Brazilian Ministry of Agriculture, Livestock and Supply.
India, another major agriculture economy with the largest number of farmers in the world, consumes more than 4.5 million tons of potash per year with a growth rate of 9%. It is another country whose demand for potash fertilizer can not be satisfied by domestic supply, and has to rely heavily on imports. Most farmers are of disadvantage economically and have to resort to government subsidy for fertilizer products. It is estimated that India is likely to spend about $30 billion on fertilizer subsidy in 2008.
While demand of potash fertilizers comes from all over the world, the supply of potash is extremely concentrated. Potassium, the major chemical element of potash, is the seventh most abundant chemical element in the world, yet the minable potash deposit is rare to find. Minable potash deposit is only found in 20 regions of the world and only 12 countries produce potash to provide fertilizers for over 150 countries. Blessed by the geographic location, Canada has the world's largest and best potash reserves and about 95% of its reserves are found in the province of Saskatchewan, where Potash Corp. is located.
Over 50% of the world's potash reserve is found in Saskatchewan, and over 65% of the global potash capacity is located in two regions – Saskatchewan (37%) and FSU (30%). Saskatchewan is the best place to mine potash as its deposits are flat-lying evaporated sea beds that are relatively easy to mine. Other countries with significant potash deposit include Russia, Belarus, Germany, etc. With 13.2 million KCI tones, Potash Corp. is the number 1 potash manufacture with 22% of world potash capacity.
Since 2000, demand growth in potash more than double new capacity growth. In its 2nd quarter earnings release, Potash Corp. claimed that
...as demand continued to exceed available supply in the quarter, Potash Corp. and Canpotex,…… shipped volumes to customers in North America and offshore, respectively, on an allocation basis.
To put it explicitly, demand from some importing countries could not get the volume they want. China, for example, only received poultry portion (18%) of its total potash imported in 2007 from Potash Corp. because of the delay in its price negotiation with Canpotex and supply constraint from Potash Corp..
Will this disequilibrium situation be improved going forward? In the short term, unfortunately, significant increase in potash supply to match the demand is mostly unlikely due to inventory decline and production capacity constraints. At the end of 2nd quarter 2008, Potash Corp.'s inventory was at record low of 315,000 tones, representing 58% below the inventory level at the same time last year and 53% below March 31, 2008 levels. Aggregate potash supply in the marketplace in 2008 is 41% below the previous 5-year average.
Contrarily, the demand of the major fertilizers remains robust and shows no sign of waning. From Potash Corp.'s 2nd quarter earnings release:
"Second quarter potash sales volumes of 2.7 million tones were the 2nd highest in history", trailing only to the 2nd quarter last year "because offshore volumes were 7% below the same period last year due to lack of available product".
Demand from North America customers increased 3% despite a weather delayed spring season; and offshore demand increased substantially.
"Compared to the same period in 2007, second-quarter volumes to Brazil increased by 36% to 670,000 tones, to Southeast Asia by 49% to 825,000 tones and to India by 28% to 310,000 tones."
With regard to the aggregate amount of potash imports from developing countries, the most stunning growth reward goes to India - in the first half of 2008, India's potash import grew over 90% compared to the same period in 2007.
Solid Support for Pricing Power
The imbalance in the dynamics of supply and demand of potash underpins the upward trend in potash pricing. Potash Corp.'s 2nd quarter earnings release discloses that:
The per-tonne North American realized price of $403 was up 122% quarter over quarter, as we realized five price increases in that time totaling more than $330 per tonne. ……
The offshore realized price of $417 was up 192% from last year's second quarter as, since that time, Canpotex realized 10 price increases totaling approximately $520 per tonne to Brazil and eight increases totaling $465 per ton to Southeast Asia. It also began to realize the $355-per-tonne increase built into India's new contract in March, while the $400-per-tonne increase in China's contract signed in April did not appear until late in the quarter because of limited available supply.
As the imbalance in potash supply and demand intensifies, price might go even higher. As a matter of fact, Potash Corp. just released a new domestic potash price list on July 8th, 2008, raising $250 per short ton of product shipped into the US market, effective September 1 through November 30, 2008.
The shortage in potash supply has propelled the price to $1000 per ton. It is reported that SE Asia countries and Brazil have started to accept contracts featuring a price tag of about $1,000/ton, deliverable in August 2008. In its news announcement, Canpotex
confirms that it has now concluded significant volumes for shipment to Asian spot markets in the fourth quarter at a price level of USD 1000 for standard grade material ($1025 for granular grade). As a result, Canpotex is advising it's customers that all new sales for shipment through the balance of 2008 will be priced at these new and higher levels. The new pricing will also apply to all new sales to customers in Brazil and Latin America".
Given that $100/st increase in potash price and in N, P, K fertilizers prices only incurs $0.03/bu and $0.14/bu to corn cost, respectively, and the relatively high incremental returns farmers can harvest, the high prices for fertilizers paid by farmers around the world seem to be sustainable and still have room to go.
Apparently in many major agriculture developing economies, potash is significantly under-applied according to the scientific recommendation levels for the major fertilizer elements – Nitrogen, Phosphate, and Potash. Lack of application of potash depletes the potassium nutrient content in the soils, resulting poor crop yields even though enough Nitrogen and Phosphate fertilizer are applied. For instance, corn yields in China and other developing countries are only 50% of those in the US. As the arable farmland per capita continues to decrease yet the food demand continues to rise, the best possible solution for China, India, Brazil and other agricultural countries to provide sustainable food supply to their citizens and curb rising food price is to empower the farmers to apply more potash to utilize other elements of fertilizer and retain nutrient content in the soils, ultimately improve yields.
Scientific formula to maximize the utilization of Nitrogen and Phosphate calls for significant increase in the amount of Potash for countries such as China, India and Thailand.
Quality Earnings Growth
Potash Corp. most likely will continue to deliver superior earnings growth as it increases its capacity to meet the robust global demand. In the coming two years, Potash could complete the Lenigan and Patience Lake Projects and increase production capacity by over 20%. In the long term, however, Potash could increase its potash production capacity considerably. When completed, Potash Corp.'s expanded projects, including Cory Project, New Brunswich project, Rocanville and Allan Project, will bring total potash production capacity to 15.7 million tones by end of 2012 and up to 17.2 million tones by 2015.
In addition, Potash Corp.'s earnings will benefit from the upward trend for the spot price of potash. The tight supply and increasingly strong demand most likely will continue to grant pricing power to Potash Corp. and its peers. According to Fertecon Ltd, a fertilizer economic and market consultancy firm, "the outlook for potash price is extremely firm with new record price levels achieved for July".
Fertecon estimates that the spot potash price will continue to rise from $625/ton in 2008 up to $1350/ton by 2011. Thereafter the spot potash price will fall back temporarily to about $1000/ton in 2014 and rise again to $1500/ton by 2020. From 2009 to 2020, the average price for potash is expected to be $1150/ton.
As demand for fertilizers increases, Potash Corp.'s market share will continue to expand. It is well known by now that population growth (the world adds over 70 million people a year) and economic growth exert significant demand in food, especially food with richer nutrition, such as livestock, in the coming years and decades; And the industrial consumptions of crops, mainly from ethanol production, only steepen the demand curve for grains.
It is estimated that demand growth for potash worldwide could reach 3% to 4% per year, which is equivalent to growth of more than 2 million ton per year. Demand from certain regions, such as emerging economies, will outgrow others. China, India and other developing countries have long under-applied fertilizers, resulting in poor soil quality hence low crop yields. Should China, India and Brazil make efforts to approach the scientific recommendation of fertilizer usage to maximize the efficiency of applied fertilizers in order to improve crop yields, the demand of Potash from these three countries could double, from 21 million ton to 50 million ton in the next 15 to 20 years.
Impact of Increase in Natural Gas Prices
As natural gas prices increase, the "cost of goods sold" for nitrogen fertilizer manufacturers increases too as natural gas constitutes significant part of the costs to produce nitrogen.
Yet the price for nitrogen fertilizer has been rising almost in tandem with that of ammonia.
According to Amber Waves – the economics of Food, Farming, Natural Resource, and Rural America,
the composite fertilizer price increased 113% from 2000 to 2007, led by gains in nitrogen prices. During the same period, the price of ammonia, the main source of nitrogen in fertilizer production, increased 130% from $227 to $523 per ton. The price of urea, the primary solid nitrogen fertilizer used in the US, rose 127% from $200 to $453 per ton.
In May 2008, while the price of ammonia are ranging between $425 to $555 per ton, the price of urea rose to between $605 - $680 per ton with a much larger rate of increase which allows the fertilizer producer to offset the rising costs in raw materials.
Although a further sharp rise in natural gas prices would impose great pressure on the margins of nitrogen fertilizer manufacturers, Potash Corp. will be the least affected since it possesses low-cost natural gas contracts in Trinidad.
These long term contracts shield Potash Corp. from the major fluctuations in the natural gas costs, and allow it benefit from the rising nitrogen fertilizer prices to the greatest extent.
Now that we see the natural gas price declining, the resultant lower materials costs for the major fertilizers would be positive for Potash Corp.'s profit margins.
Impact of Agriculture Commodity Prices
One of the risk factors on Potash Corp.'s margins is the agricultural commodities prices. Declining agriculture commodity prices could potentially force farmers to scale back on crops production and fertilizers applications.
Yet as long as grain prices stay above certain level where marginal output exceeds marginal cost, farmers have the incentive to maximize production and improve crop yield by utilizing balanced fertilizer application. And if corn price and other agrimodities (agriculture commodity) prices stay high enough, farmers even have the incentive to take more fragile land out of the federal Conservation Reserve Program to increase operation scale and improve production. While some grains, such as wheat, are seeing increasing stocks and their prices show signs of softening lately, the largest potash consuming category, corn which consumes more than nine times as much potash as wheat, may see its price remaining high over time.
Like other agrimodities, corn price is experiencing a correction as well, yet to a certain extent, it is a price adjustment from the price deviation due to the abnormal weather in North America in June this year. The continuing decline in corn stocks and strong demand suggest a high price for corn.
According to Allendale, USDA official March 31st release was 3.419 billion bushels use, an increase of 39% over the usage of a year ago for the 3rd quarter (2.535 billion bushels) and representing more than 35% over the average usage for 3rd quarter. The three year average third quarter use has been 2.525 billion bushels and five year average 2.409 billion bushels. In addition, USDA's acreage and quarterly stocks for corn suggest a fall in end stocks from 1.433 billion bushels for the 2007/08 market year to an estimated 568 million bushels for the 2008/09 market year.
Many experts from international government agencies predict that food price will rise about 5% this year and remain high at least in the near future. In the long term, the upward trend in agricultural commodity price as a result of strong demand for food, livestock, and biofuel remain intact and is irreversible. Rising agrimodity prices over time are likely to continue to provide farmers incentives to expand operation and increase production, and sustain the strong demand for potash and other fertilizers.
Impact of Oil Prices
A decline in oil prices would also decrease the transportation/shipping costs for fertilizers producers and reduce input costs for farmers around the world, which should be a positive for both fertilizer providers and farmers.
Valuation
In most of the 2005 and 2006, Potash Corp. has been traded with a P/E ratio of about 20x, and started in early 2007 to experience a steady P/E expansion. For most of the year 2008, Potash Corp. has been traded with a P/E [TTM] premium higher than 50x before it drops to 30x.
Currently Potash Corp. is traded at about 28 times of trailing-twelve-month earnings and at about 15 times of 2008 estimated earnings, yet the forward P/E for 2009 is just about 8.68x. If we assume conservatively that, at the end of 2009, Potash Corp. would be traded at the valuation of its pre-food-crisis level, which is about 20x, the price of POT would be between $15.5 x 20.8 = 322.4 and $22.35 x 20.8 = 464.88, with the average of price of $19.57 x 20.8 = $407.06. (15.5, 22.35 and 19.57 are the low estimate, high estimate and average estimate of earnings for 2009 by analysts, respectively).
In the world of commodities, no other commodity is so unevenly "allocated" by nature as potash, with Canada, Russia, and Belarus being home to 85% of the known world reserves; and no other commodity is so tightly controlled by a cartel as potash, of which supply could almost be legally "monopolized".
And to add some urgency to the situation, there is no substitute for potash. High product pricing power and sales volume power result in lucrative free cash flows from its operations. In the 2nd quarter 2008, Potash Corp. generated $894.6 million of operating cash flow and $1055.4 million total cash flow, an increase of 70% and 122.8% over the same time period last year, respectively. With great foresight, the management of Potash Corp. has made the wise move to invest its rich cash flows in building its production capacity to meet the future increasing demand for its products.
In a capital and labor intensive industry, fertilizer companies have been seeing very impressive profit margins comparable with traditionally high margin business due to the tremendous pricing power of its products. For the trailing twelve months, Potash Corp.'s operating margin is 41.29% and profit margin is 31.05%. As prices of fertilizers continue to rise, Potash Corp.'s profit margin will continue to improve, providing a great degree of margin of safety in the current tough macroeconomic environment.
The pricing power of fertilizers, along with the strong demand, has made fertilizer business one of the most profitable businesses in the current investment environment. In the last twelve months Potash Corp. achieved a return on equity of 37.07%, exceeding its cost of capital with a great margin. Potash Corp. has a debt-to-capital ratio of 25.6%. The relative high ROE demonstrated that the management of Potash has the acumen and the ability to effectively use leverage to capture business opportunity and monetize it successfully.
Endowed by nature and blessed by great timing, Potash Corp. is immersed with rare opportunities, once every many decades for agricultural companies to catch up with the unprecedented growth of emerging economies. With the least government control and enormous barrier of entry to the fertilizer business and its economies of scale, Potash Corp. is in a unique position to benefit tremendously from the escalation of food prices, increasing meat consumptions, the long term population growth, and the economic growth of the emerging markets
Yet I think many investors overreacted to the situation. Please see my analysis below.
With the largest fertilizers manufacturing capacity, Potash Corp. provides farmers around the world with the three primary plant nutrients – potash, nitrogen and phosphate, enabling the farmers to enrich the soil and improve yields. It is the largest potash producer, the second largest producer of nitrogen and the third largest producer of phosphate in the world. We expect Potash Corp. to continue to deliver quality earnings in the coming years.
"Skewed" Supply-Demand Dynamics
The demand for potash has been very strong worldwide.
In China, due to the massive industrialization and urbanization, especially, the rapid development in its agriculture, the demand for potash has increased from 2 million ton to 10 million ton per annum over the last decade. China has been one of the largest importers of potash from the consortium lately, buying almost one third of the output from Potash Corp.. Among the major three elements of fertilizer, nitrogen, phosphate and potash, China is self-sufficient with the former two, and in 2007 China turned itself from a phosphate importer to a phosphate exporter.
Potash is the only element that China has to heavily rely on imports, since the potassium resource is severely scarce in China. Every year, China has to import about 70% of potassium fertilizer products and 2007 alone purchased 9.414 million ton from abroad, an increase of 33.5% compared to the amount of import of potassium products in 2006.
At the Conference of the International Fertilizer Industry Association [IFA] held in May this year in Vienna, Chinese representatives expressed interest in expanding cooperation with the major potash exporters. Note that this took place after the stunning increase in potash import price for China in April 2008. Challenged by the strong demand of potash, China has no choice but accepts the skyrocketing prices for imported potash.
Thailand, a major agriculture economy in Asia, heavily relies on chemical fertilizers to improve productivity. Yet nearly all chemical fertilizers and raw materials for fertilizer mixing must be imported since necessary raw materials for manufacturing chemical fertilizers can not be found on domestic land. Although lack of raw materials for chemical fertilizer subjects the country to the world market price fluctuation, the government of Thailand controls the prices of chemical fertilizer sold to its farmers, and has to provide subsidy if necessary.
Brazil is the third largest importer of potash, consuming about 15% of the global potash market and growing at 11% per year. (China and US are the largest market for potash, consuming 21% and 18% respectively.) As the largest ethanol producer in the world and with a major agriculture economy, Brazil has an insatiable demand for fertilizers to grow corn, soybeans, sugarcane and other agriculture commodities. The trend seems showing little change. It is reported that the demand for potash fertilizer has been unusually strong in the first quarter of this year, and expected to have its highest agricultural income ever in 2008, reaching $84.2 billion, an increase of 14% over 2007 according to the Brazilian Ministry of Agriculture, Livestock and Supply.
India, another major agriculture economy with the largest number of farmers in the world, consumes more than 4.5 million tons of potash per year with a growth rate of 9%. It is another country whose demand for potash fertilizer can not be satisfied by domestic supply, and has to rely heavily on imports. Most farmers are of disadvantage economically and have to resort to government subsidy for fertilizer products. It is estimated that India is likely to spend about $30 billion on fertilizer subsidy in 2008.
While demand of potash fertilizers comes from all over the world, the supply of potash is extremely concentrated. Potassium, the major chemical element of potash, is the seventh most abundant chemical element in the world, yet the minable potash deposit is rare to find. Minable potash deposit is only found in 20 regions of the world and only 12 countries produce potash to provide fertilizers for over 150 countries. Blessed by the geographic location, Canada has the world's largest and best potash reserves and about 95% of its reserves are found in the province of Saskatchewan, where Potash Corp. is located.
Over 50% of the world's potash reserve is found in Saskatchewan, and over 65% of the global potash capacity is located in two regions – Saskatchewan (37%) and FSU (30%). Saskatchewan is the best place to mine potash as its deposits are flat-lying evaporated sea beds that are relatively easy to mine. Other countries with significant potash deposit include Russia, Belarus, Germany, etc. With 13.2 million KCI tones, Potash Corp. is the number 1 potash manufacture with 22% of world potash capacity.
Since 2000, demand growth in potash more than double new capacity growth. In its 2nd quarter earnings release, Potash Corp. claimed that
...as demand continued to exceed available supply in the quarter, Potash Corp. and Canpotex,…… shipped volumes to customers in North America and offshore, respectively, on an allocation basis.
To put it explicitly, demand from some importing countries could not get the volume they want. China, for example, only received poultry portion (18%) of its total potash imported in 2007 from Potash Corp. because of the delay in its price negotiation with Canpotex and supply constraint from Potash Corp..
Will this disequilibrium situation be improved going forward? In the short term, unfortunately, significant increase in potash supply to match the demand is mostly unlikely due to inventory decline and production capacity constraints. At the end of 2nd quarter 2008, Potash Corp.'s inventory was at record low of 315,000 tones, representing 58% below the inventory level at the same time last year and 53% below March 31, 2008 levels. Aggregate potash supply in the marketplace in 2008 is 41% below the previous 5-year average.
Contrarily, the demand of the major fertilizers remains robust and shows no sign of waning. From Potash Corp.'s 2nd quarter earnings release:
"Second quarter potash sales volumes of 2.7 million tones were the 2nd highest in history", trailing only to the 2nd quarter last year "because offshore volumes were 7% below the same period last year due to lack of available product".
Demand from North America customers increased 3% despite a weather delayed spring season; and offshore demand increased substantially.
"Compared to the same period in 2007, second-quarter volumes to Brazil increased by 36% to 670,000 tones, to Southeast Asia by 49% to 825,000 tones and to India by 28% to 310,000 tones."
With regard to the aggregate amount of potash imports from developing countries, the most stunning growth reward goes to India - in the first half of 2008, India's potash import grew over 90% compared to the same period in 2007.
Solid Support for Pricing Power
The imbalance in the dynamics of supply and demand of potash underpins the upward trend in potash pricing. Potash Corp.'s 2nd quarter earnings release discloses that:
The per-tonne North American realized price of $403 was up 122% quarter over quarter, as we realized five price increases in that time totaling more than $330 per tonne. ……
The offshore realized price of $417 was up 192% from last year's second quarter as, since that time, Canpotex realized 10 price increases totaling approximately $520 per tonne to Brazil and eight increases totaling $465 per ton to Southeast Asia. It also began to realize the $355-per-tonne increase built into India's new contract in March, while the $400-per-tonne increase in China's contract signed in April did not appear until late in the quarter because of limited available supply.
As the imbalance in potash supply and demand intensifies, price might go even higher. As a matter of fact, Potash Corp. just released a new domestic potash price list on July 8th, 2008, raising $250 per short ton of product shipped into the US market, effective September 1 through November 30, 2008.
The shortage in potash supply has propelled the price to $1000 per ton. It is reported that SE Asia countries and Brazil have started to accept contracts featuring a price tag of about $1,000/ton, deliverable in August 2008. In its news announcement, Canpotex
confirms that it has now concluded significant volumes for shipment to Asian spot markets in the fourth quarter at a price level of USD 1000 for standard grade material ($1025 for granular grade). As a result, Canpotex is advising it's customers that all new sales for shipment through the balance of 2008 will be priced at these new and higher levels. The new pricing will also apply to all new sales to customers in Brazil and Latin America".
Given that $100/st increase in potash price and in N, P, K fertilizers prices only incurs $0.03/bu and $0.14/bu to corn cost, respectively, and the relatively high incremental returns farmers can harvest, the high prices for fertilizers paid by farmers around the world seem to be sustainable and still have room to go.
Apparently in many major agriculture developing economies, potash is significantly under-applied according to the scientific recommendation levels for the major fertilizer elements – Nitrogen, Phosphate, and Potash. Lack of application of potash depletes the potassium nutrient content in the soils, resulting poor crop yields even though enough Nitrogen and Phosphate fertilizer are applied. For instance, corn yields in China and other developing countries are only 50% of those in the US. As the arable farmland per capita continues to decrease yet the food demand continues to rise, the best possible solution for China, India, Brazil and other agricultural countries to provide sustainable food supply to their citizens and curb rising food price is to empower the farmers to apply more potash to utilize other elements of fertilizer and retain nutrient content in the soils, ultimately improve yields.
Scientific formula to maximize the utilization of Nitrogen and Phosphate calls for significant increase in the amount of Potash for countries such as China, India and Thailand.
Quality Earnings Growth
Potash Corp. most likely will continue to deliver superior earnings growth as it increases its capacity to meet the robust global demand. In the coming two years, Potash could complete the Lenigan and Patience Lake Projects and increase production capacity by over 20%. In the long term, however, Potash could increase its potash production capacity considerably. When completed, Potash Corp.'s expanded projects, including Cory Project, New Brunswich project, Rocanville and Allan Project, will bring total potash production capacity to 15.7 million tones by end of 2012 and up to 17.2 million tones by 2015.
In addition, Potash Corp.'s earnings will benefit from the upward trend for the spot price of potash. The tight supply and increasingly strong demand most likely will continue to grant pricing power to Potash Corp. and its peers. According to Fertecon Ltd, a fertilizer economic and market consultancy firm, "the outlook for potash price is extremely firm with new record price levels achieved for July".
Fertecon estimates that the spot potash price will continue to rise from $625/ton in 2008 up to $1350/ton by 2011. Thereafter the spot potash price will fall back temporarily to about $1000/ton in 2014 and rise again to $1500/ton by 2020. From 2009 to 2020, the average price for potash is expected to be $1150/ton.
As demand for fertilizers increases, Potash Corp.'s market share will continue to expand. It is well known by now that population growth (the world adds over 70 million people a year) and economic growth exert significant demand in food, especially food with richer nutrition, such as livestock, in the coming years and decades; And the industrial consumptions of crops, mainly from ethanol production, only steepen the demand curve for grains.
It is estimated that demand growth for potash worldwide could reach 3% to 4% per year, which is equivalent to growth of more than 2 million ton per year. Demand from certain regions, such as emerging economies, will outgrow others. China, India and other developing countries have long under-applied fertilizers, resulting in poor soil quality hence low crop yields. Should China, India and Brazil make efforts to approach the scientific recommendation of fertilizer usage to maximize the efficiency of applied fertilizers in order to improve crop yields, the demand of Potash from these three countries could double, from 21 million ton to 50 million ton in the next 15 to 20 years.
Impact of Increase in Natural Gas Prices
As natural gas prices increase, the "cost of goods sold" for nitrogen fertilizer manufacturers increases too as natural gas constitutes significant part of the costs to produce nitrogen.
Yet the price for nitrogen fertilizer has been rising almost in tandem with that of ammonia.
According to Amber Waves – the economics of Food, Farming, Natural Resource, and Rural America,
the composite fertilizer price increased 113% from 2000 to 2007, led by gains in nitrogen prices. During the same period, the price of ammonia, the main source of nitrogen in fertilizer production, increased 130% from $227 to $523 per ton. The price of urea, the primary solid nitrogen fertilizer used in the US, rose 127% from $200 to $453 per ton.
In May 2008, while the price of ammonia are ranging between $425 to $555 per ton, the price of urea rose to between $605 - $680 per ton with a much larger rate of increase which allows the fertilizer producer to offset the rising costs in raw materials.
Although a further sharp rise in natural gas prices would impose great pressure on the margins of nitrogen fertilizer manufacturers, Potash Corp. will be the least affected since it possesses low-cost natural gas contracts in Trinidad.
These long term contracts shield Potash Corp. from the major fluctuations in the natural gas costs, and allow it benefit from the rising nitrogen fertilizer prices to the greatest extent.
Now that we see the natural gas price declining, the resultant lower materials costs for the major fertilizers would be positive for Potash Corp.'s profit margins.
Impact of Agriculture Commodity Prices
One of the risk factors on Potash Corp.'s margins is the agricultural commodities prices. Declining agriculture commodity prices could potentially force farmers to scale back on crops production and fertilizers applications.
Yet as long as grain prices stay above certain level where marginal output exceeds marginal cost, farmers have the incentive to maximize production and improve crop yield by utilizing balanced fertilizer application. And if corn price and other agrimodities (agriculture commodity) prices stay high enough, farmers even have the incentive to take more fragile land out of the federal Conservation Reserve Program to increase operation scale and improve production. While some grains, such as wheat, are seeing increasing stocks and their prices show signs of softening lately, the largest potash consuming category, corn which consumes more than nine times as much potash as wheat, may see its price remaining high over time.
Like other agrimodities, corn price is experiencing a correction as well, yet to a certain extent, it is a price adjustment from the price deviation due to the abnormal weather in North America in June this year. The continuing decline in corn stocks and strong demand suggest a high price for corn.
According to Allendale, USDA official March 31st release was 3.419 billion bushels use, an increase of 39% over the usage of a year ago for the 3rd quarter (2.535 billion bushels) and representing more than 35% over the average usage for 3rd quarter. The three year average third quarter use has been 2.525 billion bushels and five year average 2.409 billion bushels. In addition, USDA's acreage and quarterly stocks for corn suggest a fall in end stocks from 1.433 billion bushels for the 2007/08 market year to an estimated 568 million bushels for the 2008/09 market year.
Many experts from international government agencies predict that food price will rise about 5% this year and remain high at least in the near future. In the long term, the upward trend in agricultural commodity price as a result of strong demand for food, livestock, and biofuel remain intact and is irreversible. Rising agrimodity prices over time are likely to continue to provide farmers incentives to expand operation and increase production, and sustain the strong demand for potash and other fertilizers.
Impact of Oil Prices
A decline in oil prices would also decrease the transportation/shipping costs for fertilizers producers and reduce input costs for farmers around the world, which should be a positive for both fertilizer providers and farmers.
Valuation
In most of the 2005 and 2006, Potash Corp. has been traded with a P/E ratio of about 20x, and started in early 2007 to experience a steady P/E expansion. For most of the year 2008, Potash Corp. has been traded with a P/E [TTM] premium higher than 50x before it drops to 30x.
Currently Potash Corp. is traded at about 28 times of trailing-twelve-month earnings and at about 15 times of 2008 estimated earnings, yet the forward P/E for 2009 is just about 8.68x. If we assume conservatively that, at the end of 2009, Potash Corp. would be traded at the valuation of its pre-food-crisis level, which is about 20x, the price of POT would be between $15.5 x 20.8 = 322.4 and $22.35 x 20.8 = 464.88, with the average of price of $19.57 x 20.8 = $407.06. (15.5, 22.35 and 19.57 are the low estimate, high estimate and average estimate of earnings for 2009 by analysts, respectively).
In the world of commodities, no other commodity is so unevenly "allocated" by nature as potash, with Canada, Russia, and Belarus being home to 85% of the known world reserves; and no other commodity is so tightly controlled by a cartel as potash, of which supply could almost be legally "monopolized".
And to add some urgency to the situation, there is no substitute for potash. High product pricing power and sales volume power result in lucrative free cash flows from its operations. In the 2nd quarter 2008, Potash Corp. generated $894.6 million of operating cash flow and $1055.4 million total cash flow, an increase of 70% and 122.8% over the same time period last year, respectively. With great foresight, the management of Potash Corp. has made the wise move to invest its rich cash flows in building its production capacity to meet the future increasing demand for its products.
In a capital and labor intensive industry, fertilizer companies have been seeing very impressive profit margins comparable with traditionally high margin business due to the tremendous pricing power of its products. For the trailing twelve months, Potash Corp.'s operating margin is 41.29% and profit margin is 31.05%. As prices of fertilizers continue to rise, Potash Corp.'s profit margin will continue to improve, providing a great degree of margin of safety in the current tough macroeconomic environment.
The pricing power of fertilizers, along with the strong demand, has made fertilizer business one of the most profitable businesses in the current investment environment. In the last twelve months Potash Corp. achieved a return on equity of 37.07%, exceeding its cost of capital with a great margin. Potash Corp. has a debt-to-capital ratio of 25.6%. The relative high ROE demonstrated that the management of Potash has the acumen and the ability to effectively use leverage to capture business opportunity and monetize it successfully.
Endowed by nature and blessed by great timing, Potash Corp. is immersed with rare opportunities, once every many decades for agricultural companies to catch up with the unprecedented growth of emerging economies. With the least government control and enormous barrier of entry to the fertilizer business and its economies of scale, Potash Corp. is in a unique position to benefit tremendously from the escalation of food prices, increasing meat consumptions, the long term population growth, and the economic growth of the emerging markets
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