Deere shares jump as analyst reports robust demand for large agricultural equipment in Sept.
PITTSBURGH (AP) -- Shares of Deere & Co., the world's largest of maker of farm machinery, ticked higher Monday as an analyst reported surging sales of large agricultural equipment in September.
Shares of the Moline, Ill.-based company shot up $4.33, or 11.4 percent, to $42.45. Deere shares have traded between $34 and $94.89 over the past year, and are off 54 percent since January.
In an investor note, Robert W. Baird & Co. analyst Robert McCarthy wrote that row crop tractor sales jumped 60 percent in September compared with the same month last year, while 4WD tractor sales more than doubled.
Sales of combines, or harvesters, grew 58 percent in September, the most important month of the year for sales of the machines, he wrote.
Deere reported it had not seen significant order cancellations for fiscal 2009, "suggesting the current economic turmoil and recent crop price softening have yet to impact demand for large agricultural equipment," McCarthy wrote.
The analyst rates the stock a "Neutral."
Monday, October 13, 2008
Saturday, October 11, 2008
Potash Corp.: No Liquidity Problems Here
The problem with some analysts these days is that they have no clue of financials, accounting, financing decisions, investment decisions, dividend policies, buybacks.....they are simply analysts who call out a target based on what other analysts have concluded.
Being an accountant by profession, a banker by day and university finance professor by night, I can safely say that Andrew Snyder's liquidity analysis is completely out of line, although his ratios are correct.
Potash Corp. (POT), on the surface, has a negative current ratio, negative working capital as of June 30, 2008. This is a major shift from December 31, 2007 and due entirely to the repurchase of close to $1.5 billion of company shares which consumed cash. They did this as they thought this was the best investment with a positive net present value. Their cashflow will quickly replenish this situation and we should not be alarmed with this situation.
To say that the company has a liquidity problem is like saying an individual has a liquidity problem; although he is making $900,000 per year, his house is paid off, he has $5,000 in his bank account and owes $8,000 on his credit card.....yes, he is illiquid, but he can quickly offset this situation with his earnings or new long term debt on his house.
The stock is trading based on a $450 per tonne while the current price is $1,000 per tonne, and the company's President recently said he could get $5,000 per tonne, but did not want to go this route due to the possibility of killing demand.
I suggest that analysts like Snyder understand the full situation prior to publishing these types of articles.
Being an accountant by profession, a banker by day and university finance professor by night, I can safely say that Andrew Snyder's liquidity analysis is completely out of line, although his ratios are correct.
Potash Corp. (POT), on the surface, has a negative current ratio, negative working capital as of June 30, 2008. This is a major shift from December 31, 2007 and due entirely to the repurchase of close to $1.5 billion of company shares which consumed cash. They did this as they thought this was the best investment with a positive net present value. Their cashflow will quickly replenish this situation and we should not be alarmed with this situation.
To say that the company has a liquidity problem is like saying an individual has a liquidity problem; although he is making $900,000 per year, his house is paid off, he has $5,000 in his bank account and owes $8,000 on his credit card.....yes, he is illiquid, but he can quickly offset this situation with his earnings or new long term debt on his house.
The stock is trading based on a $450 per tonne while the current price is $1,000 per tonne, and the company's President recently said he could get $5,000 per tonne, but did not want to go this route due to the possibility of killing demand.
I suggest that analysts like Snyder understand the full situation prior to publishing these types of articles.
Terra Industries Inc.: Zacks Rank Buy
Terra Industries Inc. (NYSE: TRA - News) has seen its stock crushed in the market downturn as the fertilizers moved out of favor on fears of a commodities crash. The company is now incredibly cheap, trading at only 2.8x projected earnings, yet fundamentals remain intact.
TRA has surprised on estimates the prior 2 quarters by an average of 30.11%. Analysts still expect year over year earnings growth of 152.49%. Terra is expected to report third-quarter earnings on Oct 23.
Company Description
Terra Industries produces nitrogen products for agricultural, industrial and environmental customers. TRA owns 6 North American manufacturing facilities and owns a 50% interest in joint ventures in the UK and The Republic of Trinidad and Tobago.
The company's product line includes ammonia, urea ammonium nitrate solutions (UAN), ammonium nitrate and urea.
Terra Industries Crushed Second Quarter Estimates by 51.22%
On July 24, TRA reported second quarter earnings that easily beat Wall Street estimates by 63 cents a share. Earnings per share were $1.85 compared to analysts' estimates of $1.23 per share. Net income soared to $202.2 million from $69.4 million in the second quarter of 2007.
Revenues jumped 22% to $843.1 million from $692.5 million in the year ago period mainly due to higher nitrogen product pricing. Ammonia rose 48%, UAN increased 48% and ammonium nitrate gained 25% over a year ago prices.
There was strong nitrogen product demand resulting from low grain inventories and high grain prices.
Outlook
Terra saw record earnings in the second quarter but can it repeat its performance? In July, the company expected strong demand to continue for the remainder of the year as customers would need to fill their storage capacity in anticipation of the spring 2009 planting and application season.
At the end of the second quarter, the company expected tight supplies to continue to support higher prices. However, with the commodities downturn and the credit crisis, the outlook for some of the nitrogen products has changed. Urea prices, for instance, have fallen over the last few weeks.
Consensus Estimates Still Rising
Despite uncertainty in the nitrogen fertilizer market, covering analysts have been raising estimates for the third quarter and the full year. Third-quarter estimates are up 10 cents to $1.52 in the last 30 days.
For the full year, estimates jumped 9% to $5.98 from $5.49 per share in the last month.
Value Fundamentals
Terra Industries is a Zacks #1 Rank (Strong Buy) stock. TRA is dirt cheap. It is trading at only 2.8x forward earnings and has a price-to-book of 1.79.
TRA has an excellent five year average return on equity (ROE) of 16.45%. Additionally, the company pays a dividend with a current yield of 2.00%.
TRA has surprised on estimates the prior 2 quarters by an average of 30.11%. Analysts still expect year over year earnings growth of 152.49%. Terra is expected to report third-quarter earnings on Oct 23.
Company Description
Terra Industries produces nitrogen products for agricultural, industrial and environmental customers. TRA owns 6 North American manufacturing facilities and owns a 50% interest in joint ventures in the UK and The Republic of Trinidad and Tobago.
The company's product line includes ammonia, urea ammonium nitrate solutions (UAN), ammonium nitrate and urea.
Terra Industries Crushed Second Quarter Estimates by 51.22%
On July 24, TRA reported second quarter earnings that easily beat Wall Street estimates by 63 cents a share. Earnings per share were $1.85 compared to analysts' estimates of $1.23 per share. Net income soared to $202.2 million from $69.4 million in the second quarter of 2007.
Revenues jumped 22% to $843.1 million from $692.5 million in the year ago period mainly due to higher nitrogen product pricing. Ammonia rose 48%, UAN increased 48% and ammonium nitrate gained 25% over a year ago prices.
There was strong nitrogen product demand resulting from low grain inventories and high grain prices.
Outlook
Terra saw record earnings in the second quarter but can it repeat its performance? In July, the company expected strong demand to continue for the remainder of the year as customers would need to fill their storage capacity in anticipation of the spring 2009 planting and application season.
At the end of the second quarter, the company expected tight supplies to continue to support higher prices. However, with the commodities downturn and the credit crisis, the outlook for some of the nitrogen products has changed. Urea prices, for instance, have fallen over the last few weeks.
Consensus Estimates Still Rising
Despite uncertainty in the nitrogen fertilizer market, covering analysts have been raising estimates for the third quarter and the full year. Third-quarter estimates are up 10 cents to $1.52 in the last 30 days.
For the full year, estimates jumped 9% to $5.98 from $5.49 per share in the last month.
Value Fundamentals
Terra Industries is a Zacks #1 Rank (Strong Buy) stock. TRA is dirt cheap. It is trading at only 2.8x forward earnings and has a price-to-book of 1.79.
TRA has an excellent five year average return on equity (ROE) of 16.45%. Additionally, the company pays a dividend with a current yield of 2.00%.
Friday, October 3, 2008
Wilted Ag Sector May Grow Anew
The government's bailout plan, I believe, is too little and too late to make any significant difference in the current credit crisis that continues to worsen.
The meltdown is far beyond Wall Street and the banking industry, because available credit is frozen everywhere, from large corporations to small businesses, and many companies are having a difficult time even meeting payroll because of the inability to borrow short-term money.
We certainly have extreme readings on sentiment indicators in the market, and we are certainly very oversold. Rate cuts, around the world, are a possibility, and that would certainly spark at least a short-term rally. However, I don't know if the rally will have any legs, and we will have to examine the action as indices hit heavy resistance levels.
One area that looks extremely attractive to me and is heavily oversold is the agricultural sector. Many companies in this sector are down between 50% and 70%, all because of forced selling as funds moved to quickly raise cash.
I like the fact that the agricultural sector isn't dependent on worldwide economic growth, but on population growth, which isn't slowing, especially in developing markets.
In addition to this population growth, income growth will also increase the demand for food. Even a modest amount of income growth in developing countries will increase demand for food.
Even though the U.S. is in, I believe, a Wall Street-induced recession, the Chinese economy will continue to expand along with consumer incomes all across Asia. That means the demands for agricultural foods, beef and related products will continue to expand no matter what the U.S. economy does.
Let's take a look at a couple of exchange-traded funds that may give investors an opportunity to take advantage of extremely oversold conditions in this sector.
The first fund is the Market Vectors Agribusiness . This fund's objective is to closely replicate the price and performance of the DAX Global Agribusiness Index. The fund's mandate is to invest at least 80% of its total assets in equity securities in worldwide companies engaged in agriculture.
The top five holdings of this fund are Syngenta , Monsanto , Potash , Deere and Mosaic . The fund holds 7% to 8% of its assets in each one of these companies.
The chart below shows that since the high in June, the price of the ETF has fallen more than 50%. Currently, many of the companies in this fund are trading at extreme discounts to earnings, and that may signal an opportunity to contrarian investors.
If you want to invest directly in the commodities, consider the Powershares DB Agricultural ETF. This fund is set up to track the Deutsche Bank Liquid Commodity Index, which is intended to reflect the agricultural sector. The index currently consists of commodities such as corn, soybeans, wheat and sugar.
Tthis fund has also had its troubles, dropping more than 30% from its July highs. The current price is extremely oversold and due for at least a snapback rally.
Current market conditions can certainly push these funds lower than they are now, but over the longer term I think that the agricultural sector will turn out to be an extremely profitable venture. The key of course is to take small bites and to use protective sell-stops in case the selling accelerates.
The meltdown is far beyond Wall Street and the banking industry, because available credit is frozen everywhere, from large corporations to small businesses, and many companies are having a difficult time even meeting payroll because of the inability to borrow short-term money.
We certainly have extreme readings on sentiment indicators in the market, and we are certainly very oversold. Rate cuts, around the world, are a possibility, and that would certainly spark at least a short-term rally. However, I don't know if the rally will have any legs, and we will have to examine the action as indices hit heavy resistance levels.
One area that looks extremely attractive to me and is heavily oversold is the agricultural sector. Many companies in this sector are down between 50% and 70%, all because of forced selling as funds moved to quickly raise cash.
I like the fact that the agricultural sector isn't dependent on worldwide economic growth, but on population growth, which isn't slowing, especially in developing markets.
In addition to this population growth, income growth will also increase the demand for food. Even a modest amount of income growth in developing countries will increase demand for food.
Even though the U.S. is in, I believe, a Wall Street-induced recession, the Chinese economy will continue to expand along with consumer incomes all across Asia. That means the demands for agricultural foods, beef and related products will continue to expand no matter what the U.S. economy does.
Let's take a look at a couple of exchange-traded funds that may give investors an opportunity to take advantage of extremely oversold conditions in this sector.
The first fund is the Market Vectors Agribusiness . This fund's objective is to closely replicate the price and performance of the DAX Global Agribusiness Index. The fund's mandate is to invest at least 80% of its total assets in equity securities in worldwide companies engaged in agriculture.
The top five holdings of this fund are Syngenta , Monsanto , Potash , Deere and Mosaic . The fund holds 7% to 8% of its assets in each one of these companies.
The chart below shows that since the high in June, the price of the ETF has fallen more than 50%. Currently, many of the companies in this fund are trading at extreme discounts to earnings, and that may signal an opportunity to contrarian investors.
If you want to invest directly in the commodities, consider the Powershares DB Agricultural ETF. This fund is set up to track the Deutsche Bank Liquid Commodity Index, which is intended to reflect the agricultural sector. The index currently consists of commodities such as corn, soybeans, wheat and sugar.
Tthis fund has also had its troubles, dropping more than 30% from its July highs. The current price is extremely oversold and due for at least a snapback rally.
Current market conditions can certainly push these funds lower than they are now, but over the longer term I think that the agricultural sector will turn out to be an extremely profitable venture. The key of course is to take small bites and to use protective sell-stops in case the selling accelerates.
Guidance Up; Stock Price Down
It's not often that a company raises guidance and its stock drops 16% on the day, but that's exactly what happened to Monsanto (NYSE: MON) yesterday.
The company increased its earnings-per-share guidance to around $3.59 this fiscal year, up from its range of $3.49 to $3.51 from just two weeks ago. Monsanto is scheduled to release official earnings next Wednesday; I wonder if the final earnings number will be even larger.
But investors are rightfully not all that interested in what happened in the most recent quarter. We tend to look forward, and there's a lot to be worried about.
On Wednesday, fertilizer maker Mosaic (NYSE: MOS) released lower-than-expected earnings, and worry that farmers may cut back on their need for high-priced fertilizer pushed down fellow makers Agrium (NYSE: AGU) and PotashCorp (NYSE: POT). Monsanto came along for the ride presumably because investors are worried that lower grain prices are going to put pressure on Monsanto's Roundup or seed prices. But the company increased its expected gross profits from Roundup for next fiscal year by almost 10%. That sounds a tad optimistic, but given the company's knack for beating its own estimates, it's hard to bet against Monsanto.
The bigger problem may be the credit crisis. It doesn't matter what the price of grain is, if farmers can't get loans to buy seeds from Monsanto and Syngenta (NYSE: SYT), or tractors from Deere (NYSE: DE), the entire agriculture sector will suffer.
Given that, I do like the long-term outlook for Monsanto and the rest of the agricultural industry, but the fact that much of the industry is tied to the price of grain scares me a lot. The prices of the stocks and grain have come down considerably, but I'm not ready to call the bottom quite yet. Investors would be wise to wait until fear has been completely priced in before jumping into the sector.
The company increased its earnings-per-share guidance to around $3.59 this fiscal year, up from its range of $3.49 to $3.51 from just two weeks ago. Monsanto is scheduled to release official earnings next Wednesday; I wonder if the final earnings number will be even larger.
But investors are rightfully not all that interested in what happened in the most recent quarter. We tend to look forward, and there's a lot to be worried about.
On Wednesday, fertilizer maker Mosaic (NYSE: MOS) released lower-than-expected earnings, and worry that farmers may cut back on their need for high-priced fertilizer pushed down fellow makers Agrium (NYSE: AGU) and PotashCorp (NYSE: POT). Monsanto came along for the ride presumably because investors are worried that lower grain prices are going to put pressure on Monsanto's Roundup or seed prices. But the company increased its expected gross profits from Roundup for next fiscal year by almost 10%. That sounds a tad optimistic, but given the company's knack for beating its own estimates, it's hard to bet against Monsanto.
The bigger problem may be the credit crisis. It doesn't matter what the price of grain is, if farmers can't get loans to buy seeds from Monsanto and Syngenta (NYSE: SYT), or tractors from Deere (NYSE: DE), the entire agriculture sector will suffer.
Given that, I do like the long-term outlook for Monsanto and the rest of the agricultural industry, but the fact that much of the industry is tied to the price of grain scares me a lot. The prices of the stocks and grain have come down considerably, but I'm not ready to call the bottom quite yet. Investors would be wise to wait until fear has been completely priced in before jumping into the sector.
Mosiac Earnings Disappoint - Only Up 384% (MOS, POT, AGU)
Agricultural nutrients and fertilizer producer The Mosaic Company (NYSE:MOS) reported net earnings of $2.65 per share October 1, and if the market’s reaction is any indication of the tenor for the upcoming earnings season, it’s time to strap ourselves in for a shaky ride for the rest of 2008. (Speaking of earnings season, another good read is: Five Tricks Companies Use During Earnings Season.)
Mosaic’s net earnings of $1.18 billion improved 384% from the $305 million posted a year ago. And that’s not one of those facade-laden growth rates, where one of the comparison quarters is thrown off by a huge one-time expense or gain. Mosaic’s performance was about as organic as nearly 400% can be - revenue growth was more than a double with $4.3 billion in sales as opposed to just over $2 billion last year.
Average prices for the company’s two largest revenue sources - potash and phosphates for crop fertilizers - are up well over 200% in less than a year, or as the company stated in its news release, "substantially" higher. The average rate for potash (most of which are set in medium-term contracts) was $488 per tonne, while phosphate sold for an average of $1,013 per tonne during the quarter. The rapid price increases have allowed gross margins to expand by 12 percentage points, from 26% to more than 38% in the quarter ending August 31.
When Did We Get So Optimistic?
Alas to any readers new to this slice of the ag sector, these blowout figures were not unexpected by analysts. Mosaic actually missed earnings estimates of $2.94, although it beat revenue-side estimates by about $200 million. The "miss" on earnings, combined with a planned slowdown in the production of its number-one product (phosphates), helped to send the stock into the slammer. On October 2, Mosaic was down as much as 30%.
The losses carried over into leading potash producer Potash Corp. of Saskatchewan (NYSE:POT) and Agrium (NYSE:AGU), both of which were down more than 20% in mid-day trading.
If the reaction to Mosaic’s earnings are any indication of the tone for Q4 earnings, I suggest we all pick up an extra bottle of Maalox (sold by Novartis NYSE:NVS) before next week. Mosaic was generally upbeat in its conference call, noting that fundamentals in the ag sector remain healthy. Strong underlying demand versus limited supplies of most agricultural nutrients should keep prices either stable or moving upward in the near future.
Analysts Making Me Cynical
The planned slowdown of phosphates - which makes up over half of Mosaic’s sales - is for between 500,000 and 1 million tonnes over the next few months, or between 6% and 12% of a full year’s production level. This is certainly noteworthy and will affect sales, but prices are expected to remain in the $1,020 to $1,080 range. Analysts have unfortunately missed the baton again; as soon as their precious estimates had to be notched down, they downgraded the stock, adjusting price targets down by as much as $40 per share! The typical sell-side analysts’ behavior is increasingly becoming a contrarian indicator for me. If they say "sell", I want to buy, and if they say "buy", chances are the stock is already up 50% in the past month and about to crest.
Potash Corp’s 20% stock drubbing October 2 is even more puzzling. Phosphates are much less important to Potash Corp, where the nutrient makes up less than one-third of sales. As the company’s descriptive name suggests, potash is the main driver of earnings, and Mosaic noted in its earnings call that pricing trends are still going upward for potash, and that global supplies are much tighter than for phosphates.
If These Guys Are Wrong, I Don’t Wanna’ Be Right
Potash Corp, Agrium and Mosaic all trade for P/E ratios (current year) well under 10. Forward multiples based on 2009 earnings estimates are all the way down to the four- to five-times level. If we are indeed already in a recession (or standing right at the precipice), then earnings estimates will be coming down across every sector.
However, if pricing for the ag nutrients has indeed stabilized at these higher levels based on fundamental supply/demand forces, maybe there isn’t the inevitable next shoe to drop. I for one do not want to bet against the secular trends here. World grain inventories are at 35-year lows, and many emerging markets crave more protein in their diet, which means more grain for feedstocks.
Parting Thoughts
The cash flow being thrown off by these companies is amazing. Mosaic is on pace to deliver more than $3.5 billion in operating cash flow over the next 12 months, or nearly 25% of the company’s total market cap. If they wanted to, Mosaic and Potash Corp. could start buying back 10-15% of their shares every year and take over the entire companies' private stock in less than a decade. If analysts keep their heads stuck in the dirt, it just may be the best allocation of capital from management’s perspective. (For more information regarding cash flow, see: How Some Companies Abuse Cash Flow.)
Mosaic’s net earnings of $1.18 billion improved 384% from the $305 million posted a year ago. And that’s not one of those facade-laden growth rates, where one of the comparison quarters is thrown off by a huge one-time expense or gain. Mosaic’s performance was about as organic as nearly 400% can be - revenue growth was more than a double with $4.3 billion in sales as opposed to just over $2 billion last year.
Average prices for the company’s two largest revenue sources - potash and phosphates for crop fertilizers - are up well over 200% in less than a year, or as the company stated in its news release, "substantially" higher. The average rate for potash (most of which are set in medium-term contracts) was $488 per tonne, while phosphate sold for an average of $1,013 per tonne during the quarter. The rapid price increases have allowed gross margins to expand by 12 percentage points, from 26% to more than 38% in the quarter ending August 31.
When Did We Get So Optimistic?
Alas to any readers new to this slice of the ag sector, these blowout figures were not unexpected by analysts. Mosaic actually missed earnings estimates of $2.94, although it beat revenue-side estimates by about $200 million. The "miss" on earnings, combined with a planned slowdown in the production of its number-one product (phosphates), helped to send the stock into the slammer. On October 2, Mosaic was down as much as 30%.
The losses carried over into leading potash producer Potash Corp. of Saskatchewan (NYSE:POT) and Agrium (NYSE:AGU), both of which were down more than 20% in mid-day trading.
If the reaction to Mosaic’s earnings are any indication of the tone for Q4 earnings, I suggest we all pick up an extra bottle of Maalox (sold by Novartis NYSE:NVS) before next week. Mosaic was generally upbeat in its conference call, noting that fundamentals in the ag sector remain healthy. Strong underlying demand versus limited supplies of most agricultural nutrients should keep prices either stable or moving upward in the near future.
Analysts Making Me Cynical
The planned slowdown of phosphates - which makes up over half of Mosaic’s sales - is for between 500,000 and 1 million tonnes over the next few months, or between 6% and 12% of a full year’s production level. This is certainly noteworthy and will affect sales, but prices are expected to remain in the $1,020 to $1,080 range. Analysts have unfortunately missed the baton again; as soon as their precious estimates had to be notched down, they downgraded the stock, adjusting price targets down by as much as $40 per share! The typical sell-side analysts’ behavior is increasingly becoming a contrarian indicator for me. If they say "sell", I want to buy, and if they say "buy", chances are the stock is already up 50% in the past month and about to crest.
Potash Corp’s 20% stock drubbing October 2 is even more puzzling. Phosphates are much less important to Potash Corp, where the nutrient makes up less than one-third of sales. As the company’s descriptive name suggests, potash is the main driver of earnings, and Mosaic noted in its earnings call that pricing trends are still going upward for potash, and that global supplies are much tighter than for phosphates.
If These Guys Are Wrong, I Don’t Wanna’ Be Right
Potash Corp, Agrium and Mosaic all trade for P/E ratios (current year) well under 10. Forward multiples based on 2009 earnings estimates are all the way down to the four- to five-times level. If we are indeed already in a recession (or standing right at the precipice), then earnings estimates will be coming down across every sector.
However, if pricing for the ag nutrients has indeed stabilized at these higher levels based on fundamental supply/demand forces, maybe there isn’t the inevitable next shoe to drop. I for one do not want to bet against the secular trends here. World grain inventories are at 35-year lows, and many emerging markets crave more protein in their diet, which means more grain for feedstocks.
Parting Thoughts
The cash flow being thrown off by these companies is amazing. Mosaic is on pace to deliver more than $3.5 billion in operating cash flow over the next 12 months, or nearly 25% of the company’s total market cap. If they wanted to, Mosaic and Potash Corp. could start buying back 10-15% of their shares every year and take over the entire companies' private stock in less than a decade. If analysts keep their heads stuck in the dirt, it just may be the best allocation of capital from management’s perspective. (For more information regarding cash flow, see: How Some Companies Abuse Cash Flow.)
Monsanto Co
Monsanto Co (MON) has topped consensus estimates consistently for the last 4 quarters. On Thursday, the company boosted its 2008 earnings outlook for the second time in as many months to dispel fears of high phosphorous prices upsetting its business. The analyst community accordingly narrowed its quarterly loss view for Monsanto to 12 cents per share. The most accurate estimate, however, is pegged at a loss of 10 cents for the fourth quarter. Monsanto is scheduled to report on Wednesday, Oct 10, before the start of trading.
Is Agriculture Dead?
Ag is dead - or so says the MarketBeat blog.
The post lists all sorts of related companies, noting how much they are down, and throws in a comparison to Microsoft (MSFT) and the tech bubble.
The ag companies have earnings, and there is clear and obvious demand for their product as part of the resource theme and the global ascendancy theme, as opposed to internet stocks which were valued based on eyeballs.
So clearly ag is different!
Hang with me here, I'm not going where you think I am.
I do think ag is different, but that may not be right. The fundamental case for ag in terms of the world needing their stuff seems different - but that may not be right. The ag companies make a lot of money and trade at valuations that can be measured - but that may not matter.
Ag is either different or it isn't. If you have a 2-3% weighting you don't have to be right about it being different. It would be better if you could be right but you don't have to be. If you have 10-15% or more in ag, well, it does matter whether you are right or not.
I have had Monsanto (MON) for a long time, bought on the way up in the high $80s, sold some in the $120s and still have the stock down here, a few points under water. The way things have worked out, it is maybe 1% of the portfolio.
There is no convincing me that the name will not be a moon shot. I like the name so much I would have it over to Thanksgiving dinner (trying to inject some humor). If I am wrong and the name goes to zero, that will be bad but not ruinous. I preach on and on about moderation in themes like these for this very reason.
If you follow the logic of the MarketBeat post, then we can conclude that there are people who made the same mistakes with ag as with tech from way back when.
All ag stocks are down a lot. All mining stocks are down a lot. All emerging market stocks are down a lot. All oil stocks are down a lot. All industrial stocks are down a lot. All financials stocks are down a lot. Owning some of these is not a problem. Owning too many could be. This might sound subtle, but in terms of portfolio impact it could be quite meaningful.
(By the way, I am not suggesting anyone buy Monsanto. It is just an example; I assume you have stocks that you would like to have over for Thanksgiving dinner too.)
The post lists all sorts of related companies, noting how much they are down, and throws in a comparison to Microsoft (MSFT) and the tech bubble.
The ag companies have earnings, and there is clear and obvious demand for their product as part of the resource theme and the global ascendancy theme, as opposed to internet stocks which were valued based on eyeballs.
So clearly ag is different!
Hang with me here, I'm not going where you think I am.
I do think ag is different, but that may not be right. The fundamental case for ag in terms of the world needing their stuff seems different - but that may not be right. The ag companies make a lot of money and trade at valuations that can be measured - but that may not matter.
Ag is either different or it isn't. If you have a 2-3% weighting you don't have to be right about it being different. It would be better if you could be right but you don't have to be. If you have 10-15% or more in ag, well, it does matter whether you are right or not.
I have had Monsanto (MON) for a long time, bought on the way up in the high $80s, sold some in the $120s and still have the stock down here, a few points under water. The way things have worked out, it is maybe 1% of the portfolio.
There is no convincing me that the name will not be a moon shot. I like the name so much I would have it over to Thanksgiving dinner (trying to inject some humor). If I am wrong and the name goes to zero, that will be bad but not ruinous. I preach on and on about moderation in themes like these for this very reason.
If you follow the logic of the MarketBeat post, then we can conclude that there are people who made the same mistakes with ag as with tech from way back when.
All ag stocks are down a lot. All mining stocks are down a lot. All emerging market stocks are down a lot. All oil stocks are down a lot. All industrial stocks are down a lot. All financials stocks are down a lot. Owning some of these is not a problem. Owning too many could be. This might sound subtle, but in terms of portfolio impact it could be quite meaningful.
(By the way, I am not suggesting anyone buy Monsanto. It is just an example; I assume you have stocks that you would like to have over for Thanksgiving dinner too.)
The Real Reasons Fertilizer Stocks Are In the Dirt
Wednesday afternoon the sell-off in fertilizer stocks was reignited. Mosaic (MOS) released its latest earnings report and the results were good, but not good enough.
We were prepared for some rough times, but I don’t think any of us thought it was going to get this bad:
Mosaic (MOS) down $104.
Potash Corp (POT) down $139.
Agrium (AGU) down $70.
Sure, Mosaic is growing profits, margins, cash flows, and sales, but they missed expectations. In a market like this, missing by just a penny could easily result in a disastrous sell-off.
Mosaic missed, and paid the price. Shares plummeted 40% on Thursday.
For anyone looking to “buy on bad news,” there’s a lot more to consider. This sell-off in once-darling fertilizer stocks has happened for a lot of reasons. And those same reasons are what will limit fertilizer stocks' upside from here.
1. Great Expectations, Big Disappointments
As I stated back in early August in reference to fertilizer companies,
Expectations were just too high. Nobody could live up to them…
From here it could be a long way to go before the uptrend resumes in these stocks.
It has been a long way down since then. The fundamentals haven’t been able to stop the downward momentum.
Big expectations usually lead to big disappointments.
2. Basic Current Valuation
I know the basic arguments: Mosaic has a forward P/E ratio of 4, its margins have been regularly expanding, it sold off Saskferco, and the agriculture story (emerging markets, biofuels, no new farmland, etc.), but it hasn’t played out too well over the past couple of months for fertilizer companies
Nevertheless, they have done nothing but fall over the past two months and many investors are left scratching their heads. But this one isn’t too tough to figure out.
As the world is finally starting to realize, many of the forward estimates were a bit too high. After all, high commodity prices usually have some impact on demand. And in this case, although total revenues have increased steadily for the Big Three and margins have increased, no one is expecting the great times to last.
These are mining stocks and are highly cycle. You have to price those discounts into the market.
Granted, it’s going to take some time to bring new supply on line (it takes 5-7 years to bring a new potash mine on line), but it will come. Rest assured there will be more fertilizer supply coming, which will help bring fertilizer prices back down and significantly reduce the long-term profitability of many of these fertilizer companies.
3. Long-term Value
The long-term is probably one of the biggest issues holding back fertilizer stocks. We cannot forget the importance of fertilizer, after all, in the last 50 years the amount of arable farmland has dropped 37% on a per capita basis. So fertilizer consumption will not disappear.
High fertilizer prices have done one thing though; they’ve brought a lot of competition into the market. Potash is the perfect example. The following companies are expanding big into potash. Here are a few examples, though by no means all of them:
Mosaic – is still on schedule to ramp up its potash production by 50% over the next 12 years. In a plan laid out in April, Mosaic stated it will invest $3.15 billion in expanding its potash mines to increase production from 10.4 million tonnes to 15.5 million tonnes by 2020.
Uralkali (URALY.PK) – Despite some setbacks, Uralkali is on pace to increase its potash production by 35% by the end of 2010.
Rio Tinto (RTP) – Rio Tinto has been one of the top mining companies that has declared its intentions to move into potash mining. A little over a month ago the mining giant stated it will spend $3.5 billion to open a potash mine in Argentina.
At last report, Rio Tinto stated it expects this mine to produce about 2.3 million tonnes of potash in early 2012 and then ramp up to full capacity of 4.3 million tonnes by 2020.
BHP Billiton (BHP) – has been one of the most aggressive mining majors to jump into the potash race. BHP shelled out $284 million to buy out Anglo Potash last spring. Anglo held a 25% stake in BHP’s Saskatchewan potash project.
BHP expects this mine to start producing potash as early as 2012 and has not confirmed a timeline since the takeover. But it should be on line between 2012 and 2015.
Potash One (KCLOF) – is one of the leading potash “junior” companies. Potash One and a handful of others are still chasing after the big potash prize. Many are well funded and are actively laying the groundwork for a big joint-venture (i.e. with a foreign country that would put up a big loan in exchange for a supply agreement) or takeover.
These companies would need massive amounts of capital to go into production. If you look at some of their management teams, it would not be overly surprising to see one of them become a producing mine in the next few years.
4. Agriculture Commodity Prices have Plummeted
Finally, the price of agriculture commodities has quite a bit to do with how much fertilizer farmers are willing to use. If they’re getting record high prices for crops, there’s not much worry over some extra fertilizer costs. But when their profit per acre have dropped by 40% (which has happened recently) they’re going to tighten up the purse strings a bit.
Fertilizer demand does have some elasticity and it will be impacted by crop prices.Which are all interrelated. Corn prices might be high while soybean prices may be down, but they will reach equilibrium as farmers chase after the bigger cash crop.
So when you see Powershares DB Agriculture Fund (DBA) drop 35% from its highs earlier this year when the “food crisis” story really hit the mainstream, you know fertilizer demand (and profit levels of fertilizer producers) will surely follow.
As you can see, there is a lot more supply coming. We looked at a partial view of potash (Intrepid (IPI) has some plans, Russia’s Silvinet recovers from sinkhole problems, etc.), but as you can see, the same is true for most of the other forms of fertilizer as well. As long as we value fertilizer companies for their long-term profitability, it’s easy to understand how they all came crashing down to reality over the past couple of months.
There is a lot of supply coming and potash prices will likely stay around $500 to $1,000 a ton over the long term. They won’t be too high to attract aggressive amounts of new supply and they won’t be too low so that mines are going to have to be shut down. Potash prices will probably remain in a nice range where every company makes enough money (that’s even more likely since 2 cartels control more than 70% of world potash exports.)
Yesterday, Merrill Lynch (MER) analysts offered a pretty much bearish report on potash (all commodities in general for that matter) and I’m sure some others will follow. All of the downgrades will surely add to the selling pressure and will finally push these stocks to a bottom.
Of course, all this is pretty good news. There have been a lot of investors plowing money into the fertilizer sector over the past year (on the way up and the way back down) and it looks like most investors weren’t prepared. Fertilizer companies are still mining companies and there will be plenty of volatility.
Blame the hedge funds for pounding down the share prices or just look at it as a bubble that burst with the regular accompanying consequences, but I’m now starting to turn cautiously bullish on agriculture again.
This time around it won’t be a huge speculation fueled rising tide that lifts all boats. The long-term opportunity in agriculture is still there, but the biggest wins probably won’t be in fertilizer stocks, they’ll be in other agriculture subsectors.
Fertilizer stocks are in for a long period of ups and downs. I expect them then to have a few more months of rough going with plenty of false starts too. After all, there are still a few analysts with $300 and $400 price targets on Potash Corp that still have to turn negative before we can confirm a hard bottom.
Despite it all, anyone buying now should reasonably expect a 30% to 50% on Mosaic, Potash Corp, and Agrium despite any more ups and downs to come. Even with a lot of road blocks down the road, there is some significant value in the fertilizer producers.
We were prepared for some rough times, but I don’t think any of us thought it was going to get this bad:
Mosaic (MOS) down $104.
Potash Corp (POT) down $139.
Agrium (AGU) down $70.
Sure, Mosaic is growing profits, margins, cash flows, and sales, but they missed expectations. In a market like this, missing by just a penny could easily result in a disastrous sell-off.
Mosaic missed, and paid the price. Shares plummeted 40% on Thursday.
For anyone looking to “buy on bad news,” there’s a lot more to consider. This sell-off in once-darling fertilizer stocks has happened for a lot of reasons. And those same reasons are what will limit fertilizer stocks' upside from here.
1. Great Expectations, Big Disappointments
As I stated back in early August in reference to fertilizer companies,
Expectations were just too high. Nobody could live up to them…
From here it could be a long way to go before the uptrend resumes in these stocks.
It has been a long way down since then. The fundamentals haven’t been able to stop the downward momentum.
Big expectations usually lead to big disappointments.
2. Basic Current Valuation
I know the basic arguments: Mosaic has a forward P/E ratio of 4, its margins have been regularly expanding, it sold off Saskferco, and the agriculture story (emerging markets, biofuels, no new farmland, etc.), but it hasn’t played out too well over the past couple of months for fertilizer companies
Nevertheless, they have done nothing but fall over the past two months and many investors are left scratching their heads. But this one isn’t too tough to figure out.
As the world is finally starting to realize, many of the forward estimates were a bit too high. After all, high commodity prices usually have some impact on demand. And in this case, although total revenues have increased steadily for the Big Three and margins have increased, no one is expecting the great times to last.
These are mining stocks and are highly cycle. You have to price those discounts into the market.
Granted, it’s going to take some time to bring new supply on line (it takes 5-7 years to bring a new potash mine on line), but it will come. Rest assured there will be more fertilizer supply coming, which will help bring fertilizer prices back down and significantly reduce the long-term profitability of many of these fertilizer companies.
3. Long-term Value
The long-term is probably one of the biggest issues holding back fertilizer stocks. We cannot forget the importance of fertilizer, after all, in the last 50 years the amount of arable farmland has dropped 37% on a per capita basis. So fertilizer consumption will not disappear.
High fertilizer prices have done one thing though; they’ve brought a lot of competition into the market. Potash is the perfect example. The following companies are expanding big into potash. Here are a few examples, though by no means all of them:
Mosaic – is still on schedule to ramp up its potash production by 50% over the next 12 years. In a plan laid out in April, Mosaic stated it will invest $3.15 billion in expanding its potash mines to increase production from 10.4 million tonnes to 15.5 million tonnes by 2020.
Uralkali (URALY.PK) – Despite some setbacks, Uralkali is on pace to increase its potash production by 35% by the end of 2010.
Rio Tinto (RTP) – Rio Tinto has been one of the top mining companies that has declared its intentions to move into potash mining. A little over a month ago the mining giant stated it will spend $3.5 billion to open a potash mine in Argentina.
At last report, Rio Tinto stated it expects this mine to produce about 2.3 million tonnes of potash in early 2012 and then ramp up to full capacity of 4.3 million tonnes by 2020.
BHP Billiton (BHP) – has been one of the most aggressive mining majors to jump into the potash race. BHP shelled out $284 million to buy out Anglo Potash last spring. Anglo held a 25% stake in BHP’s Saskatchewan potash project.
BHP expects this mine to start producing potash as early as 2012 and has not confirmed a timeline since the takeover. But it should be on line between 2012 and 2015.
Potash One (KCLOF) – is one of the leading potash “junior” companies. Potash One and a handful of others are still chasing after the big potash prize. Many are well funded and are actively laying the groundwork for a big joint-venture (i.e. with a foreign country that would put up a big loan in exchange for a supply agreement) or takeover.
These companies would need massive amounts of capital to go into production. If you look at some of their management teams, it would not be overly surprising to see one of them become a producing mine in the next few years.
4. Agriculture Commodity Prices have Plummeted
Finally, the price of agriculture commodities has quite a bit to do with how much fertilizer farmers are willing to use. If they’re getting record high prices for crops, there’s not much worry over some extra fertilizer costs. But when their profit per acre have dropped by 40% (which has happened recently) they’re going to tighten up the purse strings a bit.
Fertilizer demand does have some elasticity and it will be impacted by crop prices.Which are all interrelated. Corn prices might be high while soybean prices may be down, but they will reach equilibrium as farmers chase after the bigger cash crop.
So when you see Powershares DB Agriculture Fund (DBA) drop 35% from its highs earlier this year when the “food crisis” story really hit the mainstream, you know fertilizer demand (and profit levels of fertilizer producers) will surely follow.
As you can see, there is a lot more supply coming. We looked at a partial view of potash (Intrepid (IPI) has some plans, Russia’s Silvinet recovers from sinkhole problems, etc.), but as you can see, the same is true for most of the other forms of fertilizer as well. As long as we value fertilizer companies for their long-term profitability, it’s easy to understand how they all came crashing down to reality over the past couple of months.
There is a lot of supply coming and potash prices will likely stay around $500 to $1,000 a ton over the long term. They won’t be too high to attract aggressive amounts of new supply and they won’t be too low so that mines are going to have to be shut down. Potash prices will probably remain in a nice range where every company makes enough money (that’s even more likely since 2 cartels control more than 70% of world potash exports.)
Yesterday, Merrill Lynch (MER) analysts offered a pretty much bearish report on potash (all commodities in general for that matter) and I’m sure some others will follow. All of the downgrades will surely add to the selling pressure and will finally push these stocks to a bottom.
Of course, all this is pretty good news. There have been a lot of investors plowing money into the fertilizer sector over the past year (on the way up and the way back down) and it looks like most investors weren’t prepared. Fertilizer companies are still mining companies and there will be plenty of volatility.
Blame the hedge funds for pounding down the share prices or just look at it as a bubble that burst with the regular accompanying consequences, but I’m now starting to turn cautiously bullish on agriculture again.
This time around it won’t be a huge speculation fueled rising tide that lifts all boats. The long-term opportunity in agriculture is still there, but the biggest wins probably won’t be in fertilizer stocks, they’ll be in other agriculture subsectors.
Fertilizer stocks are in for a long period of ups and downs. I expect them then to have a few more months of rough going with plenty of false starts too. After all, there are still a few analysts with $300 and $400 price targets on Potash Corp that still have to turn negative before we can confirm a hard bottom.
Despite it all, anyone buying now should reasonably expect a 30% to 50% on Mosaic, Potash Corp, and Agrium despite any more ups and downs to come. Even with a lot of road blocks down the road, there is some significant value in the fertilizer producers.
Agrium Shares Plummet 50%
Agrium Inc. (AGU) has received approval from the TSX to buy back up to 5% of its currently issued and outstanding common shares in the next 12 months.
CreditSights said the fertilizer producer’s healthy free cash flow and cash available on its balance sheet should allow it to fund the repurchase plan without having to issue additional debt.
The 7.9 million shares equate to a cost of $434-million at Wednesday’s closing price of $54.90 in New York.
The fixed income research firm told clients:
Despite continued strong earnings outlook in the foreseeable future, high-beta fertilizer names have been punished recently in the equity markets.
They noted that Agrium shares have plummeted more than 50% from its June 23 high.
CreditSights said the fertilizer producer’s healthy free cash flow and cash available on its balance sheet should allow it to fund the repurchase plan without having to issue additional debt.
The 7.9 million shares equate to a cost of $434-million at Wednesday’s closing price of $54.90 in New York.
The fixed income research firm told clients:
Despite continued strong earnings outlook in the foreseeable future, high-beta fertilizer names have been punished recently in the equity markets.
They noted that Agrium shares have plummeted more than 50% from its June 23 high.
Thursday, October 2, 2008
Monsanto raises its fiscal 2008 guidance
Monsanto raises guidance in hopes of allaying investor fears; Cites strong herbicide sales
ST. LOUIS (AP) -- Monsanto Co. raised its year-end earnings forecast Thursday, hoping to calm nervous investors after the agricultural products company's stock price fell this week.
Monsanto now expects net income of $3.64 per share for fiscal 2008, up from a previous range of $3.58 to $3.60. On average, analysts polled by Thomson Reuters had expected earnings per share of $3.57.
Monsanto is set to announce its earnings results next Wednesday, but the company put out its new guidance Thursday after the company's traded sharply lower. The shares closed down $15.83 or 16 percent at $82.01 amid a broader decline in the market.
"We know there is turmoil out there, but we want to make sure people know we're confident in our business," Vice President of International Operations Kerry Preete said in phone interview.
Monsanto wanted particularly to allay fears that high phosphorous prices might hurt its business. Prices for that key fertilizer have skyrocketed over the last year, and the material is an ingredient in the company's Roundup fertilizer.
Preete said phosphorous only accounts for 10 percent of the company's cost to make Roundup. Monsanto expects solid Roundup sales as global demand for the herbicide increases.
Monsanto said it expects full-year gross profit from Roundup in 2009 between $2.3 billion and $2.4 billion. It had previously estimated profit in the range of $2.1 billion to $2.2 billion. The company increased its 2012 Roundup gross-profit target to $1.9 billion from $1.8 billion.
ST. LOUIS (AP) -- Monsanto Co. raised its year-end earnings forecast Thursday, hoping to calm nervous investors after the agricultural products company's stock price fell this week.
Monsanto now expects net income of $3.64 per share for fiscal 2008, up from a previous range of $3.58 to $3.60. On average, analysts polled by Thomson Reuters had expected earnings per share of $3.57.
Monsanto is set to announce its earnings results next Wednesday, but the company put out its new guidance Thursday after the company's traded sharply lower. The shares closed down $15.83 or 16 percent at $82.01 amid a broader decline in the market.
"We know there is turmoil out there, but we want to make sure people know we're confident in our business," Vice President of International Operations Kerry Preete said in phone interview.
Monsanto wanted particularly to allay fears that high phosphorous prices might hurt its business. Prices for that key fertilizer have skyrocketed over the last year, and the material is an ingredient in the company's Roundup fertilizer.
Preete said phosphorous only accounts for 10 percent of the company's cost to make Roundup. Monsanto expects solid Roundup sales as global demand for the herbicide increases.
Monsanto said it expects full-year gross profit from Roundup in 2009 between $2.3 billion and $2.4 billion. It had previously estimated profit in the range of $2.1 billion to $2.2 billion. The company increased its 2012 Roundup gross-profit target to $1.9 billion from $1.8 billion.
Agriculture Stocks Wither
Fertilizer and agriculture companies' shares plunged Thursday as fears grew that a weakening global economy will eat away at demand for commodities and that the credit crunch will prevent farmers from buying the equipment they need to survive. Railroad companies suffered as well on concern that commodities shipments will decline.
A negative earnings report late Wednesday by fertilizer maker Mosaic set a bad tone going into Thursday trading.
Shares of Mosaic (nyse: MOS - news - people ) lost $27.86, or 41.3%, to close at $39.65, and CF Industries Holdings (nyse: CF - news - people ) shed $30.64, or 34.6%, to $58.00. Potash (nyse: POT - news - people )'s stock lost $34.53, or 27.0%, to $93.51, and Agrium (nyse: AGU - news - people ) was down by $13.29, or 24.2%, at $41.61. Merrill Lynch downgraded the sector to "underperform" from "buy."
Despite nearly tripled profits at Mosaic, earnings in the company's first 2009 quarter missed expectations and investors were disappointed by the company's plan to cut phosphate production by 500,000 to 1.0 million tons to balance high inventory levels. The company's potash business meanwhile, experienced robust demand, helped by strikes at mines operated by rival Potash. In August, Mosaic said potash inventories hit record lows.
Late Wednesday, Mosaic said earnings in the three months through Aug. 31 nearly tripled, to $1.2 billion, or $2.65 a share, from $305.5 million, or 69 cents a share, a year ago. Gains from foreign exchange effects amounted to $86.7 million, or 13 cents a share, compared with last year's loss of $19.4 million, or 3 cents a share. The company said gains from increased selling prices were offset by higher raw material costs and taxes . Sales more than doubled, to $4.3 billion, from $2.0 billion in the prior year. Analysts expected earnings of $2.94 a share and sales of $4.1 billion.
Citi Analyst Brian Yu said Mosaic was falling on the company's reduced guidance on year-end phosphate sales volume, which it now expects to be in the range of 8.0 million to 9.0 million metric tons, down from 9.0 million to 9.4 million. Yu said he expects fertilizer demand to remain strong given current concerns about global grain and oilseed supply levels and maintained a buy rating on Mosaic.
Merrill Lynch analyst Don Carson said that falling prices for phosphate and nitrogen and a smaller-than-expected rise in potash, a potassium-based crop nutrient, are causing ``considerable uncertainty'' for Potash earnings in the near term. Swiss seed maker Syngenta (nyse: SYT - news - people ) also felt the pressure as declining commodity prices hurt agricultural chemical makers.
However, Potash reaffirmed its plans for expansion on Thursday, and argued that fertilizer stocks had been hit by investor “overreaction” given the financial crisis. The company said the sector is well-positioned for the long term.
Bunge (nyse: BG - news - people ), the biggest seller of fertilizer in South America, and Monsanto (nyse: MON - news - people ), the world's biggest seed producer, tumbled as well. Carson said profit gains from Roundup herbicide, a Monsanto product, will slow. Bunge shares plummeted 20.4%, or $12.84, to $50.16 at the close, while Syngenta sank 9.4%, or $3.78, to $36.61. Monsanto lost 16.2%, or $15.83, to $82.01.
Meanwhile, U.S. Agriculture Secretary Ed Schafer said the credit crunch may impact agricultural production next year. Schafer warned that the costs of farming have soared and without loans it may be difficult to pay for operations. According to the U.S. Department of Agriculture, farm expenses are expected to rise 16.0%, to $294.8 billion this year. (See " Farmer Mac's Amber Waves Of Pain.")
Commodities fared poorly on Thursday. December corn fell 28-1/2 cents on the Chicago Board of Trade, or 5.9%, to $4.55-1/2 a bushel--a nine-month low. November soybeans were down 55 cents, or 5%, at $9.98, below the psychologically important $10.00 level. December wheat fell 32-3/4 cents, or 4.9%, to $6.36-3/4 a bushel, because of ample global supplies this year.
The railroads tumbled on Thursday as worries about decreased demand for commodities, slowing factory orders and increases in jobless claims rocked investors. CSX fell $5.85 or 11.0%, to $47.21, while Canadian National fell $3.13 or 6.6%, to $44.58. Canadian Pacific fell $4.08 or 7.8%, to $48.36, Kansas City Southern slid $7.76 or 17.8%, to $35.85. Norfolk Southern fell $8.40 or 12.9%, to $56.64, Union Pacific fell $7.34 or 10.6%, to $62.10, and Burlington Northern fell $6.49 or 7.3%, to $83.00.
A negative earnings report late Wednesday by fertilizer maker Mosaic set a bad tone going into Thursday trading.
Shares of Mosaic (nyse: MOS - news - people ) lost $27.86, or 41.3%, to close at $39.65, and CF Industries Holdings (nyse: CF - news - people ) shed $30.64, or 34.6%, to $58.00. Potash (nyse: POT - news - people )'s stock lost $34.53, or 27.0%, to $93.51, and Agrium (nyse: AGU - news - people ) was down by $13.29, or 24.2%, at $41.61. Merrill Lynch downgraded the sector to "underperform" from "buy."
Despite nearly tripled profits at Mosaic, earnings in the company's first 2009 quarter missed expectations and investors were disappointed by the company's plan to cut phosphate production by 500,000 to 1.0 million tons to balance high inventory levels. The company's potash business meanwhile, experienced robust demand, helped by strikes at mines operated by rival Potash. In August, Mosaic said potash inventories hit record lows.
Late Wednesday, Mosaic said earnings in the three months through Aug. 31 nearly tripled, to $1.2 billion, or $2.65 a share, from $305.5 million, or 69 cents a share, a year ago. Gains from foreign exchange effects amounted to $86.7 million, or 13 cents a share, compared with last year's loss of $19.4 million, or 3 cents a share. The company said gains from increased selling prices were offset by higher raw material costs and taxes . Sales more than doubled, to $4.3 billion, from $2.0 billion in the prior year. Analysts expected earnings of $2.94 a share and sales of $4.1 billion.
Citi Analyst Brian Yu said Mosaic was falling on the company's reduced guidance on year-end phosphate sales volume, which it now expects to be in the range of 8.0 million to 9.0 million metric tons, down from 9.0 million to 9.4 million. Yu said he expects fertilizer demand to remain strong given current concerns about global grain and oilseed supply levels and maintained a buy rating on Mosaic.
Merrill Lynch analyst Don Carson said that falling prices for phosphate and nitrogen and a smaller-than-expected rise in potash, a potassium-based crop nutrient, are causing ``considerable uncertainty'' for Potash earnings in the near term. Swiss seed maker Syngenta (nyse: SYT - news - people ) also felt the pressure as declining commodity prices hurt agricultural chemical makers.
However, Potash reaffirmed its plans for expansion on Thursday, and argued that fertilizer stocks had been hit by investor “overreaction” given the financial crisis. The company said the sector is well-positioned for the long term.
Bunge (nyse: BG - news - people ), the biggest seller of fertilizer in South America, and Monsanto (nyse: MON - news - people ), the world's biggest seed producer, tumbled as well. Carson said profit gains from Roundup herbicide, a Monsanto product, will slow. Bunge shares plummeted 20.4%, or $12.84, to $50.16 at the close, while Syngenta sank 9.4%, or $3.78, to $36.61. Monsanto lost 16.2%, or $15.83, to $82.01.
Meanwhile, U.S. Agriculture Secretary Ed Schafer said the credit crunch may impact agricultural production next year. Schafer warned that the costs of farming have soared and without loans it may be difficult to pay for operations. According to the U.S. Department of Agriculture, farm expenses are expected to rise 16.0%, to $294.8 billion this year. (See " Farmer Mac's Amber Waves Of Pain.")
Commodities fared poorly on Thursday. December corn fell 28-1/2 cents on the Chicago Board of Trade, or 5.9%, to $4.55-1/2 a bushel--a nine-month low. November soybeans were down 55 cents, or 5%, at $9.98, below the psychologically important $10.00 level. December wheat fell 32-3/4 cents, or 4.9%, to $6.36-3/4 a bushel, because of ample global supplies this year.
The railroads tumbled on Thursday as worries about decreased demand for commodities, slowing factory orders and increases in jobless claims rocked investors. CSX fell $5.85 or 11.0%, to $47.21, while Canadian National fell $3.13 or 6.6%, to $44.58. Canadian Pacific fell $4.08 or 7.8%, to $48.36, Kansas City Southern slid $7.76 or 17.8%, to $35.85. Norfolk Southern fell $8.40 or 12.9%, to $56.64, Union Pacific fell $7.34 or 10.6%, to $62.10, and Burlington Northern fell $6.49 or 7.3%, to $83.00.
Mosaic Falling to Pieces
Mosaic (NYSE: MOS - News) is on a free fall today after the company missed analysts' first quarter estimate and cut its phosphate production target. The stock is down 34.67% and trading at $44.55. It's been the biggest intra-day decline for the fertilizer giant in the last four years.
Bloomberg reported that Mosaic's per-share profit was $2.83 in the three months ended August 31. Analysts had expected per-share profit excluding one-time items of $2.94.
The management also said it will cut down on phosphate production by 500,000 to 1 million tons because of an ever-lengthening phosphate inventories.
Bloomberg reported that Mosaic's per-share profit was $2.83 in the three months ended August 31. Analysts had expected per-share profit excluding one-time items of $2.94.
The management also said it will cut down on phosphate production by 500,000 to 1 million tons because of an ever-lengthening phosphate inventories.
FERTILIZER PRICES SPARK WORRIES ABOUT AG BUSINESS
Consider the agricultural products sector as one of the choice morality tales on Wall Street, circa 2008. On one hand, profits continue to expand at prodigious rates, as feverish demand for products like fertilizer drive sales by triple-digit levels. However, prices flattened out earlier this year, as customers - that is, farmers - balked at spiraling costs. The twisted hand of the credit market also played a role, as farmers found access to capital increasingly difficult to come by as the growing season matured. Meanwhile, hedge funds and momentum players continued to bet aggressively on the sector, even amidst signs that fundamentals might have peaked just after mid-year - in large measure because few other sectors worked, or worked as spectacularly, as the ag business had in the first half of the year. As company profits continued to swell, those investors refused to disabuse themselves of the idea that trees grow to the sky. But as the poet wrote, ”Turn, turn, turn.” Most of the names in the group have fallen in a fashion as spectacular as the rallies that made them such darlings earlier this year. The performance of Mosiac (MOS) garnered special notice, plunging 73% from the June highs, including Thursday’s ripe 35% scrum. The decline came after it recorded quarterly results that showed profits tripled while sales in the period doubled. But after five quarters of recording profits that beat estimates by 10% or more, Mosiac actually fell short of the lofty forecasts. Worse, it said that inventories have built for products like phosphate, which represented more than half its sales. That’s led to pressure on pricing, and prompted the company to announce plans to cut back on production. In short, fundamentals have peaked. Even though almost all the names in the sector have suffered egregious haircuts - Monsanto (MON) has lost some $35 billion of market capitalization since June - it’s difficult for analysts to project the recovery in production and pricing. Ergo, shares of Potash (POT) followed Mosiac lower, down 20% on the session. Terra Industries (TRA) - hit just a week ago by worries about its exposure to urea, a prime chemical component in some fertilizer products - fell another 25% Thursday, sinking to a low for the year. The fallout has spread to other areas of the agribusiness empire, such as soybean producer Bunge (BG), which lost 20%, and equipment maker Deere (DE). Both have traded at new lows for the year.
Stubborn Ag Bulls Emerge Covered in Fertilizer
The bubble has burst for fertilizer and agricultural chemical stocks, with former stock-market star Mosaic off by a third Thursday and others hard on their heels, like Monsanto and Potash Corp. of Saskatchewan as excess supply and reduced demand slow the pattern of price increases on farm chemicals.
Mosaic, one of the two largest fertilizer makers by sales, recently fell 32% to $45.89 — and has fallen by more than $117, or over two-thirds, since June 18, even after reporting robust fiscal first-quarter earnings growth after the bell Wednesday. Mosaic’s warning that phosphate, a particular grade of fertilizer, was leveling off in price sent hedge funds and Wall Street brokers fleeing from the sector, where consistent price increases had resulted in great expectations.
The action in fertilizer stocks in particular is comparable to the technology bust of 2000 to 2001, when profitable companies like Microsoft and Intel suffered from speculators’ realization that the sky was not the limit. Farmers could not bear the weight of ever-increasing costs forever, especially as grain prices fell by half and credit tightened. And the popularity of the momentum “ag trade” with hedge funds and day traders has led to a decline similar in magnitude and pace to the tech bust.
One long-term skeptic, Citigroup chief U.S. equity strategist Tobias Levkovich, said the bullish argument on agricultural stocks never held much weight. “One of the arguments is that there’s no supply,” Mr. Levkovich said. “When demand falls off, guess what? There’s a little more supply.”
Another giant fertilizer maker, Potash of Saskatchewan, which Goldman Sachs said was one of the top 20 most popular names in hedge-fund portfolios as of the end of June, was down 22% recently at $100.42, less than half its summer peak over $240. Another peer, Bunge is off 62% from its peak, more than such beaten-down financials as Citigroup. Among other stocks exposed to farmers, seed-and-weedkiller processor Monsanto fell 17% to $81.23, off 43% from its peak. Tractor maker Deere & Co. fell 13% to $40.15, and is 58% from its peak.
Mosaic said fiscal first-quarter earnings almost quadrupled, but the immediate issue for the market was the price of phosphate, a grade of fertilizer that contributed more than half its quarterly revenue of $4.32 billion. In response to an “excess” of phosphate on the market, the leading producer of that fertilizer reduced its production, and, as a result, its projection for sales volume of phosphate for the year. Also, it expects the average price of phosphate to be around $1,020 to $1,080 a tonne, more or less level with $1,013 this quarter, after a string
Agriculture stocks were darlings when grain prices doubled and, in some cases, tripled earlier this year. Corn, which was nearly $8 a bushel at the end of June is now at $4.50, and falling again Thursday. Similar drops have occurred in wheat and soybeans. The argument that “everyone needs to eat and they’re not making land any more” has soured on the banks and funds that spread it.
Merrill Lynch cut its rating on the agricultural chemicals sector, including Mosaic and Monsanto, because of signs of weakness in phosphate, and potash, another major grade of fertilizer. Merrill also warned “a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth.”
Mosaic, one of the two largest fertilizer makers by sales, recently fell 32% to $45.89 — and has fallen by more than $117, or over two-thirds, since June 18, even after reporting robust fiscal first-quarter earnings growth after the bell Wednesday. Mosaic’s warning that phosphate, a particular grade of fertilizer, was leveling off in price sent hedge funds and Wall Street brokers fleeing from the sector, where consistent price increases had resulted in great expectations.
The action in fertilizer stocks in particular is comparable to the technology bust of 2000 to 2001, when profitable companies like Microsoft and Intel suffered from speculators’ realization that the sky was not the limit. Farmers could not bear the weight of ever-increasing costs forever, especially as grain prices fell by half and credit tightened. And the popularity of the momentum “ag trade” with hedge funds and day traders has led to a decline similar in magnitude and pace to the tech bust.
One long-term skeptic, Citigroup chief U.S. equity strategist Tobias Levkovich, said the bullish argument on agricultural stocks never held much weight. “One of the arguments is that there’s no supply,” Mr. Levkovich said. “When demand falls off, guess what? There’s a little more supply.”
Another giant fertilizer maker, Potash of Saskatchewan, which Goldman Sachs said was one of the top 20 most popular names in hedge-fund portfolios as of the end of June, was down 22% recently at $100.42, less than half its summer peak over $240. Another peer, Bunge is off 62% from its peak, more than such beaten-down financials as Citigroup. Among other stocks exposed to farmers, seed-and-weedkiller processor Monsanto fell 17% to $81.23, off 43% from its peak. Tractor maker Deere & Co. fell 13% to $40.15, and is 58% from its peak.
Mosaic said fiscal first-quarter earnings almost quadrupled, but the immediate issue for the market was the price of phosphate, a grade of fertilizer that contributed more than half its quarterly revenue of $4.32 billion. In response to an “excess” of phosphate on the market, the leading producer of that fertilizer reduced its production, and, as a result, its projection for sales volume of phosphate for the year. Also, it expects the average price of phosphate to be around $1,020 to $1,080 a tonne, more or less level with $1,013 this quarter, after a string
Agriculture stocks were darlings when grain prices doubled and, in some cases, tripled earlier this year. Corn, which was nearly $8 a bushel at the end of June is now at $4.50, and falling again Thursday. Similar drops have occurred in wheat and soybeans. The argument that “everyone needs to eat and they’re not making land any more” has soured on the banks and funds that spread it.
Merrill Lynch cut its rating on the agricultural chemicals sector, including Mosaic and Monsanto, because of signs of weakness in phosphate, and potash, another major grade of fertilizer. Merrill also warned “a global recession, particularly in Asia, represents a risk to corn prices, as it could lead to reduced demand growth.”
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