This is when they return to their rightful owners,” an ace in this business told me once when I was cutting my teeth trading my first few odd lots. I cannot help but think about him as I connect a few dots on charts and overlay them against rather unchanged supply versus demand data underneath on many commodities markets and related equities.
The noise all around an underlying shift often turns out to be just that. Now that commodities are no longer the subject of cable TV specials and have lost some eye-room for their quotes in blinking boxes -- appropriately called “the bugs”-- perhaps a secular story can quietly trump noisy sound-bites once again.
A few other things have disappeared as it turns out. According to one of my commodity research firms, at least 16 ethanol plants were in the process of bankruptcy this month. One of them, Alternative Energy Sources, could not raise money for an ethanol plant in Iowa. Even more telling, it had to shut down operations of its consulting business that apparently ran out of projects to help management of other ethanol producers. The entire firm shut down.
Thankfully I will not have to pay on this bet I offered two years ago on Minyanville: “I’ll wear a Cornhusker hat to a Longhorn rally if we look back 3-5 years and say ethanol was a tremendous investment opportunity.” It was as polite an answer as I could give to a question I had received about Pacific Ethanol (PEIX) which was trading around $20 at the time. Now it's on the non-green side of $2 a share.
Through it all, I was a secular bull on grains’ demand outstripping supply. I began buying before the ethanol myth was a factor, and will be after it has finished bankrupting late arriving longs. Below is the December '08 corn contract.
The violent retreat over the past month of many of these components has sent the index to an interesting spot. As I Buzzed about earlier this week, if I’m right about a multi-year secular uptrend driven by fundamentals, you don’t get too many technical setups of this kind along the way. And when, not if, I’m wrong with trades I choose to be taken out with tight stops while maintaining a basket of core longs.
My trading diary is quite clear about the fact that the key to a secular shift is surviving to see it happen. So I trade all the technical indicators away in a heartbeat for one set of strict sell disciplines based solely on my P&L, instead.
Wednesday, July 30, 2008
Mosaic's Outlooks Confirm Bullish Thesis
Mosaic , a farm chemicals manufacturer, handily exceeded estimates again, but shares failed to make an upside move in Tuesday trading. After the close on Monday, MOS reported EPS of $1.88, up 308% from last year's 46 cents in earnings.
Shares of Mosaic gained over 250% in the past year, and it is clear that investors are getting a bit skittish after the ag group's meteoric ride. The "lock it in" mentality is understandable given the current weak market conditions that leave investors with a quick-trigger attitude to selling.
The crux of the current bull-bear debate in MOS is the same for Potash , Agrium , and the rest of the ag sector. It centers on the sustainability of intense fertilizer demand in the face of two potential downside risks.
First, a global slowdown markedly cooling demand, which would lead to reduced product pricing. Second, the potential for reduced corn demand for ethanol production. Corn-based ethanol, as opposed to other plants, is intensive in its use of fertilizer. And there are fears that a new Presidential administration might lift the 50 cents tariff on Brazilian sugar-based ethanol.
I partially agree with a short-term bearish argument on the ag sector if the ethanol import tariff were repealed by a new Presidential administration. It is estimated that 30% of the U.S. corn crop in 2008 will be used for ethanol.
If the import tariff is repealed, then the ag stocks would sell off sharply, as estimates would need to be revised down. That would present the stocks with tough year-over-year comparisons.
But I never underestimate the power of the farm lobby and the desire of Washington politicians to pander to so many voting districts in the country's heartland.
But with or without ethanol subsidies, the future is bright for agriculture fundamentals. The main upside driver is the rise of the middle class on a global scale. The demand for higher-quality protein-based food rises in lockstep with global wealth creation. In simpler words, most people would prefer a nice juicy rib-eye steak instead of rice and beans.
Protein may be quite tasty, but it is a very inefficient form of energy transfer. I repeatedly fall back on a key statistic as part of my bullish ag thesis: it takes significantly more grain to grow and harvest the equivalent amount of protein. Specifically, 8.3 grams of grain are required to produce the equivalent one gram gain in cattle weight. It takes 3.1 grams of grain for pork, and chicken takes 2 grams.
As incomes rise, the average kilograms of meat consumed per year will inevitably rise worldwide. I believe the rest of the world will catch up to Uncle Sam's eating habits, so let's run some numbers.
The average consumption of protein in North America is roughly 120kg per year, with the developing world averaging approximately 32kg, and Africa consuming only 20kg. Basically, the world is going to see a four- to sixfold increase in demand for protein over the next generation.
Either Americans begin eating less steak and more potatoes, which I don't see happening anytime soon, or the world is going to need more fertilizer for the ensuing protein demand.
Goldman Sachs reiterated its "America's Conviction Buy list" rating on Mosaic and notes, "Fundamentals are great. Prices are moving higher and with corn acreage expected to increase significantly next year ... demand should be strong in the U.S., and globally and capacity remains constrained.
"The company is generating plenty of cash that will be used to fund the recently announced potash capacity expansions ... In our view, the recent stock-price meltdown is not indicative of the strong fertilizer fundamentals that currently don't seem to be of investor concern, but we believe will once again become relevant."
On the conference call, the company remained steadfastly bullish, stating that it continues to see strong market conditions. It sees a tight supply balance next year with the market environment exceptionally strong for fiscal 2009 (which ends in May).
The demand for fertilizer is growing at much faster rates today than in the past. In other words, there is no demand destruction at current price levels, as many bears claim.
Of note, management says that China, as one of the main global players, is the key swing factor in the phosphate and potash markets this year. It estimates that China will sharply reduce its fertilizer exports due to a 135% export tax imposed by the government on April 20.
And two points on fertilizer pricing. First, even with elevated prices, it still pays to use fertilizer. An industry survey estimates that crops achieve a net return of over $3 for every $1 invested in fertilizers. In some cases, the return is even higher. For example, an Indonesian palm oil farmer gains $9 for every $1 he spends on balanced plant nutrition.
Second, even with a $100-per-ton increase in potash prices, that would add only $0.03 to the cost of a bushel of corn.
Finally, a metric that speaks for itself. MOS is now trading at eight times fiscal 2009 consensus estimates of $15 per share. Taking all of these factors into account, I believe that these fertilizer stocks, and Mosaic in particular, represent a solid investment at current levels.
Shares of Mosaic gained over 250% in the past year, and it is clear that investors are getting a bit skittish after the ag group's meteoric ride. The "lock it in" mentality is understandable given the current weak market conditions that leave investors with a quick-trigger attitude to selling.
The crux of the current bull-bear debate in MOS is the same for Potash , Agrium , and the rest of the ag sector. It centers on the sustainability of intense fertilizer demand in the face of two potential downside risks.
First, a global slowdown markedly cooling demand, which would lead to reduced product pricing. Second, the potential for reduced corn demand for ethanol production. Corn-based ethanol, as opposed to other plants, is intensive in its use of fertilizer. And there are fears that a new Presidential administration might lift the 50 cents tariff on Brazilian sugar-based ethanol.
I partially agree with a short-term bearish argument on the ag sector if the ethanol import tariff were repealed by a new Presidential administration. It is estimated that 30% of the U.S. corn crop in 2008 will be used for ethanol.
If the import tariff is repealed, then the ag stocks would sell off sharply, as estimates would need to be revised down. That would present the stocks with tough year-over-year comparisons.
But I never underestimate the power of the farm lobby and the desire of Washington politicians to pander to so many voting districts in the country's heartland.
But with or without ethanol subsidies, the future is bright for agriculture fundamentals. The main upside driver is the rise of the middle class on a global scale. The demand for higher-quality protein-based food rises in lockstep with global wealth creation. In simpler words, most people would prefer a nice juicy rib-eye steak instead of rice and beans.
Protein may be quite tasty, but it is a very inefficient form of energy transfer. I repeatedly fall back on a key statistic as part of my bullish ag thesis: it takes significantly more grain to grow and harvest the equivalent amount of protein. Specifically, 8.3 grams of grain are required to produce the equivalent one gram gain in cattle weight. It takes 3.1 grams of grain for pork, and chicken takes 2 grams.
As incomes rise, the average kilograms of meat consumed per year will inevitably rise worldwide. I believe the rest of the world will catch up to Uncle Sam's eating habits, so let's run some numbers.
The average consumption of protein in North America is roughly 120kg per year, with the developing world averaging approximately 32kg, and Africa consuming only 20kg. Basically, the world is going to see a four- to sixfold increase in demand for protein over the next generation.
Either Americans begin eating less steak and more potatoes, which I don't see happening anytime soon, or the world is going to need more fertilizer for the ensuing protein demand.
Goldman Sachs reiterated its "America's Conviction Buy list" rating on Mosaic and notes, "Fundamentals are great. Prices are moving higher and with corn acreage expected to increase significantly next year ... demand should be strong in the U.S., and globally and capacity remains constrained.
"The company is generating plenty of cash that will be used to fund the recently announced potash capacity expansions ... In our view, the recent stock-price meltdown is not indicative of the strong fertilizer fundamentals that currently don't seem to be of investor concern, but we believe will once again become relevant."
On the conference call, the company remained steadfastly bullish, stating that it continues to see strong market conditions. It sees a tight supply balance next year with the market environment exceptionally strong for fiscal 2009 (which ends in May).
The demand for fertilizer is growing at much faster rates today than in the past. In other words, there is no demand destruction at current price levels, as many bears claim.
Of note, management says that China, as one of the main global players, is the key swing factor in the phosphate and potash markets this year. It estimates that China will sharply reduce its fertilizer exports due to a 135% export tax imposed by the government on April 20.
And two points on fertilizer pricing. First, even with elevated prices, it still pays to use fertilizer. An industry survey estimates that crops achieve a net return of over $3 for every $1 invested in fertilizers. In some cases, the return is even higher. For example, an Indonesian palm oil farmer gains $9 for every $1 he spends on balanced plant nutrition.
Second, even with a $100-per-ton increase in potash prices, that would add only $0.03 to the cost of a bushel of corn.
Finally, a metric that speaks for itself. MOS is now trading at eight times fiscal 2009 consensus estimates of $15 per share. Taking all of these factors into account, I believe that these fertilizer stocks, and Mosaic in particular, represent a solid investment at current levels.
Monday, July 28, 2008
Rio Tinto Targets 10% of World Potash Market
The world potash market is characterized by a limited number of producers where four countries - Canada, Russia, Germany and Belarus - account for three-quarters of global output.
With a tightening supply of potash worldwide projected to remain tight for the next five years, and as fertiliser sales soar in step with biofuel production, the multinational mining and resources group Rio Tinto (RTP), wants to grab 10% of the world potash market notes Daily Telegraph - according to Preston Chiaro, chief executive of Rio’s energy and minerals unit.
Bill Doyle, CEO of Canadian firm Potash Corp., the world’s largest fertilizer producer, told shareholders at the firm’s annual meeting that, “Around the world, potash customers are receiving shipments on an allocation basis, as supply is too tight to provide the full volumes they have requested.”
Global demand for potash stands at around 60m tonnes a year and is growing at about 3% a year. What’s more, fundamentally, the potash market is no longer a market of over-capacity and supply management. The potash industry has changed from being supply managed to demand driven.
All surplus capacity is currently getting absorbed to meet growing demand. The underlying fundamentals for this industry are incredibly strong which is the main driver behind Rio Tinto’s intended involvement in this market.
The push into a new commodity comes as Rio’s board fights a $140bn takeover by rival BHP Billiton (BHP).
With a tightening supply of potash worldwide projected to remain tight for the next five years, and as fertiliser sales soar in step with biofuel production, the multinational mining and resources group Rio Tinto (RTP), wants to grab 10% of the world potash market notes Daily Telegraph - according to Preston Chiaro, chief executive of Rio’s energy and minerals unit.
Bill Doyle, CEO of Canadian firm Potash Corp., the world’s largest fertilizer producer, told shareholders at the firm’s annual meeting that, “Around the world, potash customers are receiving shipments on an allocation basis, as supply is too tight to provide the full volumes they have requested.”
Global demand for potash stands at around 60m tonnes a year and is growing at about 3% a year. What’s more, fundamentally, the potash market is no longer a market of over-capacity and supply management. The potash industry has changed from being supply managed to demand driven.
All surplus capacity is currently getting absorbed to meet growing demand. The underlying fundamentals for this industry are incredibly strong which is the main driver behind Rio Tinto’s intended involvement in this market.
The push into a new commodity comes as Rio’s board fights a $140bn takeover by rival BHP Billiton (BHP).
Cramer on POT
The ethanol mandate is sending raw costs soaring for food companies, Cramer said. A repeal, which he said could happen, might cut into Potash’s business, but this is still his favorite fertilizer stock.
Ten Reasons Why I'm Waiting to Buy PotashCorp
PotashCorp of Saskatchewan (POT) is one of the world's largest fertilizer companies. It produces three plant nutrients, nitrogen, phosphate, and potash. The firm reported very solid earnings recently. Gross profit tripled year over year on a 94% jump in revenue. This came on significant price increases on nitrogen (up 57%), phosphate (up 135%), and potash (up 162%). POT expects the good times to continue, and has raised its guidance for the year to between $12 and $13 a share. The consensus among analysts, as of writing, is around $11.70 a share.
Here are some of the pros for investing in POT:
At about $200 a share (as of writing) Potash is trading around 17 times its full year earnings estimated by analysts, which is below the company's forecast.
The company is a cash machine. Free cash flow accounted for over 20% of sales in the last two quarters.
POT has been buying back shares. The company stated it intends to buy 5% this year.
The world's food stocks and arable land are at historically low levels while demand is high.
There is plenty of room for growth, as farmers in markets like Brazil and China have underused fertilizer in the past.
There are significant barriers to entry into the nitrogen, phosphorus, and potash markets.
The stock can easily double in the next couple of years as long as fertilizer prices continue to rise.
Management is knowledgeable, responsible, and shareholder friendly. The CEO has three decades of experience in the industry.
If you are interested in agriculture businesses in general, and would like a more diversified approach across a number of industries, you may want to look at the Market Vectors Agribusiness ETF (MOO). POT is currently its second largest holding while agriculture chemicals stocks account for almost half of its holdings.
Despite POT's potentially bright future, I'm waiting for a lower entry point. The reason is that there is a host of unpredictable risks:
In the near term, there is a threat of a strike at a few of the company's potash mines (they account for almost one third of the firm's potash production). A labor strike, depending on its duration, may hurt profits. The share price may fall too.
While POT's private competitors, like Agrium (AGU), Mosaic (MOS), and Yara International (YARIY) have an interest in not overly increasing supply, government owned competitors have less incentive. They may overproduce, lowering prices.
Fertilizer pricing is volatile. While prices have gone up recently, the trend may reverse. Factors affecting pricing include the weather, agriculture commodity prices, and natural gas prices.
Government policies may also affect pricing. For instance, the U.S., in its recent negotiations with India has signaled that it might cut farm subsidies. As another example, if the price of oil continues to fall, the U.S. may be less favorable toward biofuels. The Environmental Protection Agency is set to decide whether to cap corn for fuel use at 9 billion gallons for the foreseeable future (it was widely expected that the cap would rise to 15 billion gallons). This could drive corn prices lower, which in turn would hurt fertilizer demand.
While demand for food is historically high, slowing economic growth and rising inflation could cut demand for meat in places like China. This can drive down grain prices, and thus demand for fertilizer.
There are already signs of weakness. China's phosphate fertilizer demand dropped around 10% (year over year) in the last two quarters. Its potassium fertilizer demand fell about 15% (year over year) over the same period.
Rising sulfur (an important ingredient in phosphate fertilizer) costs can contract margins.
Water inflow, which potash mines commonly face, can ruin mines. This can seriously hurt profits.
Nitrogen and phosphate prices are not expected to rise very much in the future. Nitrogen and phosphate accounted for around two thirds of sales and just over half of POT's gross profits in 2007.
If the U.S. dollar weakens against the Canadian dollar, POT's earnings can be hurt.
The risks don't necessarily outweigh the potential returns. Nevertheless, as they are numerous and unpredictable, I would prefer a lower price at which to buy shares. I'll be a buyer at around 14.5 to 15 times analyst projected full year earnings.
That would be around $170 to $175 a share. I may miss the boat on this one, but that's okay..seeking alpha
Here are some of the pros for investing in POT:
At about $200 a share (as of writing) Potash is trading around 17 times its full year earnings estimated by analysts, which is below the company's forecast.
The company is a cash machine. Free cash flow accounted for over 20% of sales in the last two quarters.
POT has been buying back shares. The company stated it intends to buy 5% this year.
The world's food stocks and arable land are at historically low levels while demand is high.
There is plenty of room for growth, as farmers in markets like Brazil and China have underused fertilizer in the past.
There are significant barriers to entry into the nitrogen, phosphorus, and potash markets.
The stock can easily double in the next couple of years as long as fertilizer prices continue to rise.
Management is knowledgeable, responsible, and shareholder friendly. The CEO has three decades of experience in the industry.
If you are interested in agriculture businesses in general, and would like a more diversified approach across a number of industries, you may want to look at the Market Vectors Agribusiness ETF (MOO). POT is currently its second largest holding while agriculture chemicals stocks account for almost half of its holdings.
Despite POT's potentially bright future, I'm waiting for a lower entry point. The reason is that there is a host of unpredictable risks:
In the near term, there is a threat of a strike at a few of the company's potash mines (they account for almost one third of the firm's potash production). A labor strike, depending on its duration, may hurt profits. The share price may fall too.
While POT's private competitors, like Agrium (AGU), Mosaic (MOS), and Yara International (YARIY) have an interest in not overly increasing supply, government owned competitors have less incentive. They may overproduce, lowering prices.
Fertilizer pricing is volatile. While prices have gone up recently, the trend may reverse. Factors affecting pricing include the weather, agriculture commodity prices, and natural gas prices.
Government policies may also affect pricing. For instance, the U.S., in its recent negotiations with India has signaled that it might cut farm subsidies. As another example, if the price of oil continues to fall, the U.S. may be less favorable toward biofuels. The Environmental Protection Agency is set to decide whether to cap corn for fuel use at 9 billion gallons for the foreseeable future (it was widely expected that the cap would rise to 15 billion gallons). This could drive corn prices lower, which in turn would hurt fertilizer demand.
While demand for food is historically high, slowing economic growth and rising inflation could cut demand for meat in places like China. This can drive down grain prices, and thus demand for fertilizer.
There are already signs of weakness. China's phosphate fertilizer demand dropped around 10% (year over year) in the last two quarters. Its potassium fertilizer demand fell about 15% (year over year) over the same period.
Rising sulfur (an important ingredient in phosphate fertilizer) costs can contract margins.
Water inflow, which potash mines commonly face, can ruin mines. This can seriously hurt profits.
Nitrogen and phosphate prices are not expected to rise very much in the future. Nitrogen and phosphate accounted for around two thirds of sales and just over half of POT's gross profits in 2007.
If the U.S. dollar weakens against the Canadian dollar, POT's earnings can be hurt.
The risks don't necessarily outweigh the potential returns. Nevertheless, as they are numerous and unpredictable, I would prefer a lower price at which to buy shares. I'll be a buyer at around 14.5 to 15 times analyst projected full year earnings.
That would be around $170 to $175 a share. I may miss the boat on this one, but that's okay..seeking alpha
Terra Industries: An Interesting Fertilizer Play
A few months ago I wrote several articles about the relationship between Terra Nitrogen L.P. (TNH) and Terra Industries (TRA) concerning the earnings and dividends of Terra Nitrogen. You can see the articles here, here and here. For background, until the last quarterly dividend, TNH had a deficit of accumulated minimum dividends to work off. As of the last dividend, the deficit had been repaid and TRA was then entitled to about 44% of TNH’s earnings before dividends were paid to shareholders.
I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarter's results vividly show that outcome. Here are the comparative results for the two quarters:
First quarter 2008:
Revenue: $174.5 million
Net income: $81.6 million
Dividend: $4.20 per unit
Second quarter 2008:
Revenues: $256.7 million
Net income: $130.2 million
Net allocated to common units: $74.2 million
Dividend: $3.63
As you can see, net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still gives a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward, any hit on profitability will hit double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.
I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries. Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.
At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which it is looking for ways to enhance shareholder value. It is buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not (POT) in the fertilizer space, TRA deserves a look.
I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarter's results vividly show that outcome. Here are the comparative results for the two quarters:
First quarter 2008:
Revenue: $174.5 million
Net income: $81.6 million
Dividend: $4.20 per unit
Second quarter 2008:
Revenues: $256.7 million
Net income: $130.2 million
Net allocated to common units: $74.2 million
Dividend: $3.63
As you can see, net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still gives a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward, any hit on profitability will hit double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.
I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries. Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.
At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which it is looking for ways to enhance shareholder value. It is buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not (POT) in the fertilizer space, TRA deserves a look.
Potash Corp. Posts Record Q2 Earnings
The vote in favor of a strike by unionized workers at PotashCorp of Saskatchewan (POT) may lead to a production loss as the three potentially impacted facilities represented roughly 30% of the company’s production in 2007. However, the tight potash market means the financial impact from a work stoppage could be mitigated by higher prices for the commodity, according to RBC Capital Markets analyst Fai Lee.
Potash Corp. reported record quarterly profits on Thursday, with C$1.5-billion in earnings for the first six months of 2008.
Mr. Lee told clients that any labor disruption would be short-lived and therefore would not impact his positive long-term outlook on Potash Corp. He rates the shares at “outperform” with a $375 price target.
If the shares come under pressure as a result of the labor dispute, the analyst recommends investors pick some up. However, he suggested a hedge in buying other North American potash producers like Agrium Inc. (AGU). Mr. Lee rates Agrium at “outperform” with a $140 price target.
He said:
PotashCorp believes it has made a full, fair and responsible offer to the United Steelworkers and is hopeful that a settlement will be reached.
The analyst noted that the collective agreement for the three mines expired at the end of April. "However, it is prepared for any contingencies."
Potash Corp. reported record quarterly profits on Thursday, with C$1.5-billion in earnings for the first six months of 2008.
Mr. Lee told clients that any labor disruption would be short-lived and therefore would not impact his positive long-term outlook on Potash Corp. He rates the shares at “outperform” with a $375 price target.
If the shares come under pressure as a result of the labor dispute, the analyst recommends investors pick some up. However, he suggested a hedge in buying other North American potash producers like Agrium Inc. (AGU). Mr. Lee rates Agrium at “outperform” with a $140 price target.
He said:
PotashCorp believes it has made a full, fair and responsible offer to the United Steelworkers and is hopeful that a settlement will be reached.
The analyst noted that the collective agreement for the three mines expired at the end of April. "However, it is prepared for any contingencies."
Mosaic Quadruples Fiscal 2008 Fourth Quarter Net Earnings Over Year-Ago Quarter
Operating Earnings Grew 228% to $1.2 Billion
HIGHLIGHTS The Mosaic Company reported outstanding financial results, including net earnings of $862.5 million, or $1.93 per diluted share ("per share"), for the fourth quarter ended May 31, 2008, an increase of $659.9 million or over four fold compared to the same period a year ago. Fourth quarter results and other recent noteworthy events included the following:
- Operating earnings of $1.2 billion, or 34.0% of net sales, up from $359.8 million, or 21.4% of net sales last year.
- The average diammonium phosphate (DAP) selling price was $754 per tonne, which was substantially higher than the third quarter fiscal 2008 and fourth quarter fiscal 2007 selling prices.
- The average muriate of potash (MOP) selling price was $335 per tonne, which was substantially higher than the third quarter fiscal 2008 and fourth quarter fiscal 2007 selling prices.
- Cash flow from operating activities was $1.0 billion for the fourth quarter of fiscal 2008 compared to $253.5 million last year.
- A tax benefit of $24.1 million, or $.05 per share, primarily related to a reduction of the valuation allowance on non-U.S. deferred tax assets.
- Return on invested capital of 30.2% for fiscal 2008 compared with 8.0% for fiscal 2007.
- Mosaic achieved its goal of investment grade ratings on its outstanding senior notes in early June 2008.
PLYMOUTH, Minn., July 28 /PRNewswire-FirstCall/ -- The Mosaic Company (NYSE: MOS - News) announced today net earnings of $862.5 million, or $1.93 per share, for the fourth quarter ended May 31, 2008. These results compare with net earnings of $202.6 million, or $0.46 per share, for the quarter ended May 31, 2007. Net earnings for Mosaic's fiscal year ended, May 31, 2008, were $2.1 billion, or $4.67 per share, compared with $419.7 million, or $0.95 per share, in fiscal 2007.
Net sales in the fourth quarter of fiscal 2008 were $3.5 billion, an increase of $1.8 billion, or nearly double the amount posted in the same period a year ago.
Mosaic's gross margin for the fiscal 2008 fourth quarter was $1.3 billion, or 37.1% of net sales, compared with $456.2 million, or 27.1% of net sales, a year ago. Fourth quarter operating earnings were $1.2 billion, compared with $359.8 million for the fourth quarter in fiscal 2007. Financial performance continued to benefit from strong agricultural fundamentals and customer demand that drove significant increases in selling prices. Mosaic also had effective operational performance and the Offshore segment results benefited from positioning of lower cost inventories. These positive factors were partially offset by significantly increased Canadian resource taxes and royalties in the Potash segment, and by higher raw material costs for sulfur and ammonia in the Phosphates segment.
"We delivered outstanding financial results by every measure and in every segment during fiscal 2008 and intend to build upon these results in fiscal 2009," said Jim Prokopanko, Mosaic's President and Chief Executive Officer. "The fundamental driver of our business -- the need for more food -- continues unabated. Through balanced application of crop nutrients, farmers increase yields and help produce more food for people around the world."
Phosphates
Net sales in the Phosphates segment were $2.0 billion for the fourth quarter, which more than doubled net sales of $959.7 million a year ago. Phosphates' fourth quarter gross margin was $851.6 million, or 41.8% of net sales, compared with $266.9 million, or 27.8% of net sales, for the same period a year ago. Operating earnings were $797.4 million compared with $234.3 million for the same period last year. Operating earnings growth in the fourth quarter of fiscal 2008 was driven by significant increases in selling prices and a 5% increase in sales volumes to 2.4 million tonnes. These positive factors were partially offset by higher sulfur and ammonia raw material costs.
The average fourth quarter DAP price, FOB plant, was $754 per tonne, which is a $416 per tonne increase compared with a year ago and a $267 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise, as do raw material costs.
Potash
Net sales in the Potash segment totaled $860.5 million for the fourth quarter, an increase of 74.2% compared with a year ago. The Potash segment's gross margin increased to $342.4 million in the fourth quarter, or 39.8% of net sales, compared with $174.8 million a year ago, or 35.4% of net sales. Operating earnings were $331.3 million during the fourth quarter, an increase of $169.1 million, or double compared to the same period last year. The increase in operating earnings was primarily a result of the higher selling prices. This increase was partially offset by significantly higher Canadian resource taxes and royalties, the impact of a 4% decrease in sales volumes and a stronger Canadian dollar on operational costs.
The average fourth quarter MOP price, FOB plant, was $335 per tonne, which is a $181 per tonne increase compared with a year ago and a $114 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise.
The Potash segment's total sales volume of 2.4 million tonnes was at the high end of Mosaic's guidance range for the fourth quarter and compares with last year's fourth quarter volume of 2.5 million tonnes. The reduction in sales volume compared with the year-ago quarter was primarily due to the lack of sufficient inventory to fully meet customer demand.
Offshore
The Offshore segment's net sales totaled $695.0 million during the fourth quarter, an increase of $386.1 million or up 125% compared to the same period a year ago. This increase was mainly due to higher selling prices. Gross margin increased to $133.5 million in the fourth quarter, or 19.2% of net sales, compared to $30.3 million, or 9.8% of net sales, for the same period a year ago. Offshore operating earnings of $101.5 million were the result of higher selling prices and the benefit from the positioning of lower cost inventories in a period of rising selling prices.
Other
Selling, general, and administrative expenses (SG&A) were $96.2 million in the fourth quarter, or 2.8% of net sales, compared to $95.9 million last year or 5.7% of net sales.
A foreign currency transaction gain of $12.8 million was recorded for the fourth quarter compared to a loss of $53.5 million for the same period a year ago. The gain in the fourth quarter of fiscal 2008 is primarily the result of the effect of a strengthening Canadian dollar on significant U.S. dollar denominated intercompany receivables, intercompany loan receivables, and cash held by our Canadian affiliates.
Income tax expense was $354.0 million in the fourth quarter resulting in an effective tax rate of 29.9% compared to $85.3 million, or an effective tax rate of 31.3% last year. The lower effective rate in fiscal 2008 compared with fiscal 2007 was primarily as a result of the reduction of the valuation allowance on certain non-U.S. deferred tax assets.
Total equity earnings in non-consolidated subsidiaries were $35.8 million in the fourth quarter, compared with $16.5 million for the same period a year ago. Mosaic's equity earnings in Saskferco Products Inc. increased to $21.4 million for the fourth quarter from $11.0 million for the same period last year, primarily the result of higher nitrogen selling prices. Equity earnings in Fosfertil S.A. were $12.3 million for the fourth quarter compared to $4.1 million for the same period last year, reflecting strong phosphate industry fundamentals.
Mosaic ended the fourth quarter with $2.0 billion in cash and cash equivalents. Cash flow from operating activities in the fourth quarter of fiscal 2008 was $1.0 billion, up significantly from $253.5 million a year ago. Mosaic's total debt as of May 31, 2008 was $1.6 billion compared to $2.4 billion as of May 31, 2007, resulting in a debt-to-EBITDA ratio of 0.5 for fiscal 2008, an improvement from 2.3 a year ago.
Full Year Results
For the fiscal year ended May 31, 2008, net sales were $9.8 billion, an increase of 70.0% compared with last year. Fiscal 2008 operating earnings were $2.8 billion compared with $616.3 million for the same period a year ago. Fiscal 2008 net earnings were $2.1 billion, or $4.67 per diluted share, compared to $419.7 million, or $0.95 per share, for fiscal 2007. SG&A expenses were $323.8 million compared with $309.8 million for the same period in fiscal 2007. A foreign currency transaction loss of $57.5 million was recorded for fiscal 2008, compared to a loss of $8.6 million for the same period a year ago. Equity earnings in non-consolidated entities increased year-to-date to $124.0 million from $41.3 million last year. Cash flow from operating activities was $2.5 billion compared with $707.9 million from the previous year.
Outlook
Global demand for crop nutrients today is growing at double the rate of the last 10 years. Forecasts released by the International Fertilizer Industry Association in May 2008 indicate that demand is growing at a compound annual rate of 4.2% since 2006. This rate is more than double the rate of 1.7% from 1995 through 2005. Phosphate demand growth has accelerated from 1.9% to 3.8% per year and potash demand growth has increased from 2.3% to 4.9% per year between these same two periods.
Global grain and oilseed stocks remain at low levels despite record crops in 2007 and 2008. The latest USDA statistics released on July 11, 2008 show that inventories of the sixteen leading grain and oilseed crops will increase a measly 4.4 million tonnes this year and stocks as a percentage of use will decline to the lowest level since the early 1970s. The supply response to high agricultural commodity prices during the last two growing seasons was good, but clearly not good enough to reverse the unsustainable trend in global grain and oilseed stocks.
Increasing yields is a key to meeting the world's accelerating demands for food and fuel. Yields today are growing at the slowest rates in 35 years. For example, from 1970 to 1990, the average world wheat yield grew at a compound annual rate of 2.6 percent. This rate slowed to 1.1 percent during the 1990s and has slowed further to 0.7 percent during this decade. The trends are similar for corn, rice and soybeans. The proper use of crop nutrients can boost yields per acre by as much as a third. Yet, many essential crop nutrients have not been utilized adequately, particularly in developing countries. Improved application rates in these regions could boost production.
"We believe crop nutrients are now more essential than ever. They play a critical role in optimizing crop yields, helping meet the world's surging demand for food, feed, fiber and fuel," said Jim Prokopanko. "We are committed to doing our part in producing and supplying crop nutrients, fulfilling our mission to help the world grow the food it needs, and believe our improved financial flexibility provides us many options for our future growth."
Financial Guidance - Fiscal 2009
Sales volumes for the Phosphates segment are expected to range from 9.0 to 9.4 million tonnes for fiscal 2009. This increase is contingent upon sourcing an adequate supply of sulfur, operating mine and plant sites at high operating rates, and restarting certain previously indefinitely closed phosphoric and sulfuric acid production in the second half of the fiscal year. The restart of this phosphoric and sulfuric acid production will permit Mosaic to utilize excess granulation capacity at one of its existing plants.
Potash segment sales volumes are expected to range from 8.2 to 8.6 million tonnes in fiscal 2009. Previously announced potash capacity expansion projects will be underway in fiscal 2009; however, production from the first of the expansions will not come online until fiscal 2010. This volume estimate assumes, among other things, operating the potash facilities at high operating rates and continued successful management of the brine inflow at the Esterhazy mine. Mosaic is beginning fiscal 2009 with extremely low inventory levels, especially in Potash, compared with the inventory levels a year earlier. This will make it difficult to achieve increased sales volumes in fiscal 2009.
Mosaic's realized DAP price, FOB plant, for the first quarter of fiscal 2009 is estimated to be $1,020 to $1,080 per tonne. Partially offsetting the benefit of these higher projected prices will be higher raw material costs, principally ammonia and sulfur. Mosaic's first quarter fiscal 2009 average realized MOP price, FOB plant, is estimated to be $460 to $510 per tonne. Partially offsetting the benefit of these higher projected selling prices will be higher Canadian resource taxes and royalties. Both estimates assume farmer economics remain robust and that management has accurately estimated the mix of forward versus spot sales.
Canadian resource taxes and royalties for fiscal 2009 are estimated to range from $700 million to $1 billion due to the expected increases in the Potash segment's profitability and product selling prices. Management's estimate of the resource tax and royalties requires management to make significant assumptions about a number of matters, primarily projected selling prices and volumes, capital spending and foreign currency exchange rates. Canadian resource taxes and royalties are included as a component of cost of goods sold. These taxes and royalties approximated $361.8 million in fiscal 2008 and $154.1 million in fiscal 2007.
Capital spending for fiscal 2009 will grow significantly to a range of $900 million to $1.1 billion. Mosaic will undertake high return capital projects as well as invest substantial funds to ensure that existing plants and mines operate at peak levels. These projects include Mosaic's major multi-year potash capacity expansions and phosphate capacity expansions and cost reduction initiatives.
SG&A is estimated to range from $360 million to $390 million in fiscal 2009 and the effective income tax rate is estimated in the low to mid 30% range for the year.
HIGHLIGHTS The Mosaic Company reported outstanding financial results, including net earnings of $862.5 million, or $1.93 per diluted share ("per share"), for the fourth quarter ended May 31, 2008, an increase of $659.9 million or over four fold compared to the same period a year ago. Fourth quarter results and other recent noteworthy events included the following:
- Operating earnings of $1.2 billion, or 34.0% of net sales, up from $359.8 million, or 21.4% of net sales last year.
- The average diammonium phosphate (DAP) selling price was $754 per tonne, which was substantially higher than the third quarter fiscal 2008 and fourth quarter fiscal 2007 selling prices.
- The average muriate of potash (MOP) selling price was $335 per tonne, which was substantially higher than the third quarter fiscal 2008 and fourth quarter fiscal 2007 selling prices.
- Cash flow from operating activities was $1.0 billion for the fourth quarter of fiscal 2008 compared to $253.5 million last year.
- A tax benefit of $24.1 million, or $.05 per share, primarily related to a reduction of the valuation allowance on non-U.S. deferred tax assets.
- Return on invested capital of 30.2% for fiscal 2008 compared with 8.0% for fiscal 2007.
- Mosaic achieved its goal of investment grade ratings on its outstanding senior notes in early June 2008.
PLYMOUTH, Minn., July 28 /PRNewswire-FirstCall/ -- The Mosaic Company (NYSE: MOS - News) announced today net earnings of $862.5 million, or $1.93 per share, for the fourth quarter ended May 31, 2008. These results compare with net earnings of $202.6 million, or $0.46 per share, for the quarter ended May 31, 2007. Net earnings for Mosaic's fiscal year ended, May 31, 2008, were $2.1 billion, or $4.67 per share, compared with $419.7 million, or $0.95 per share, in fiscal 2007.
Net sales in the fourth quarter of fiscal 2008 were $3.5 billion, an increase of $1.8 billion, or nearly double the amount posted in the same period a year ago.
Mosaic's gross margin for the fiscal 2008 fourth quarter was $1.3 billion, or 37.1% of net sales, compared with $456.2 million, or 27.1% of net sales, a year ago. Fourth quarter operating earnings were $1.2 billion, compared with $359.8 million for the fourth quarter in fiscal 2007. Financial performance continued to benefit from strong agricultural fundamentals and customer demand that drove significant increases in selling prices. Mosaic also had effective operational performance and the Offshore segment results benefited from positioning of lower cost inventories. These positive factors were partially offset by significantly increased Canadian resource taxes and royalties in the Potash segment, and by higher raw material costs for sulfur and ammonia in the Phosphates segment.
"We delivered outstanding financial results by every measure and in every segment during fiscal 2008 and intend to build upon these results in fiscal 2009," said Jim Prokopanko, Mosaic's President and Chief Executive Officer. "The fundamental driver of our business -- the need for more food -- continues unabated. Through balanced application of crop nutrients, farmers increase yields and help produce more food for people around the world."
Phosphates
Net sales in the Phosphates segment were $2.0 billion for the fourth quarter, which more than doubled net sales of $959.7 million a year ago. Phosphates' fourth quarter gross margin was $851.6 million, or 41.8% of net sales, compared with $266.9 million, or 27.8% of net sales, for the same period a year ago. Operating earnings were $797.4 million compared with $234.3 million for the same period last year. Operating earnings growth in the fourth quarter of fiscal 2008 was driven by significant increases in selling prices and a 5% increase in sales volumes to 2.4 million tonnes. These positive factors were partially offset by higher sulfur and ammonia raw material costs.
The average fourth quarter DAP price, FOB plant, was $754 per tonne, which is a $416 per tonne increase compared with a year ago and a $267 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise, as do raw material costs.
Potash
Net sales in the Potash segment totaled $860.5 million for the fourth quarter, an increase of 74.2% compared with a year ago. The Potash segment's gross margin increased to $342.4 million in the fourth quarter, or 39.8% of net sales, compared with $174.8 million a year ago, or 35.4% of net sales. Operating earnings were $331.3 million during the fourth quarter, an increase of $169.1 million, or double compared to the same period last year. The increase in operating earnings was primarily a result of the higher selling prices. This increase was partially offset by significantly higher Canadian resource taxes and royalties, the impact of a 4% decrease in sales volumes and a stronger Canadian dollar on operational costs.
The average fourth quarter MOP price, FOB plant, was $335 per tonne, which is a $181 per tonne increase compared with a year ago and a $114 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise.
The Potash segment's total sales volume of 2.4 million tonnes was at the high end of Mosaic's guidance range for the fourth quarter and compares with last year's fourth quarter volume of 2.5 million tonnes. The reduction in sales volume compared with the year-ago quarter was primarily due to the lack of sufficient inventory to fully meet customer demand.
Offshore
The Offshore segment's net sales totaled $695.0 million during the fourth quarter, an increase of $386.1 million or up 125% compared to the same period a year ago. This increase was mainly due to higher selling prices. Gross margin increased to $133.5 million in the fourth quarter, or 19.2% of net sales, compared to $30.3 million, or 9.8% of net sales, for the same period a year ago. Offshore operating earnings of $101.5 million were the result of higher selling prices and the benefit from the positioning of lower cost inventories in a period of rising selling prices.
Other
Selling, general, and administrative expenses (SG&A) were $96.2 million in the fourth quarter, or 2.8% of net sales, compared to $95.9 million last year or 5.7% of net sales.
A foreign currency transaction gain of $12.8 million was recorded for the fourth quarter compared to a loss of $53.5 million for the same period a year ago. The gain in the fourth quarter of fiscal 2008 is primarily the result of the effect of a strengthening Canadian dollar on significant U.S. dollar denominated intercompany receivables, intercompany loan receivables, and cash held by our Canadian affiliates.
Income tax expense was $354.0 million in the fourth quarter resulting in an effective tax rate of 29.9% compared to $85.3 million, or an effective tax rate of 31.3% last year. The lower effective rate in fiscal 2008 compared with fiscal 2007 was primarily as a result of the reduction of the valuation allowance on certain non-U.S. deferred tax assets.
Total equity earnings in non-consolidated subsidiaries were $35.8 million in the fourth quarter, compared with $16.5 million for the same period a year ago. Mosaic's equity earnings in Saskferco Products Inc. increased to $21.4 million for the fourth quarter from $11.0 million for the same period last year, primarily the result of higher nitrogen selling prices. Equity earnings in Fosfertil S.A. were $12.3 million for the fourth quarter compared to $4.1 million for the same period last year, reflecting strong phosphate industry fundamentals.
Mosaic ended the fourth quarter with $2.0 billion in cash and cash equivalents. Cash flow from operating activities in the fourth quarter of fiscal 2008 was $1.0 billion, up significantly from $253.5 million a year ago. Mosaic's total debt as of May 31, 2008 was $1.6 billion compared to $2.4 billion as of May 31, 2007, resulting in a debt-to-EBITDA ratio of 0.5 for fiscal 2008, an improvement from 2.3 a year ago.
Full Year Results
For the fiscal year ended May 31, 2008, net sales were $9.8 billion, an increase of 70.0% compared with last year. Fiscal 2008 operating earnings were $2.8 billion compared with $616.3 million for the same period a year ago. Fiscal 2008 net earnings were $2.1 billion, or $4.67 per diluted share, compared to $419.7 million, or $0.95 per share, for fiscal 2007. SG&A expenses were $323.8 million compared with $309.8 million for the same period in fiscal 2007. A foreign currency transaction loss of $57.5 million was recorded for fiscal 2008, compared to a loss of $8.6 million for the same period a year ago. Equity earnings in non-consolidated entities increased year-to-date to $124.0 million from $41.3 million last year. Cash flow from operating activities was $2.5 billion compared with $707.9 million from the previous year.
Outlook
Global demand for crop nutrients today is growing at double the rate of the last 10 years. Forecasts released by the International Fertilizer Industry Association in May 2008 indicate that demand is growing at a compound annual rate of 4.2% since 2006. This rate is more than double the rate of 1.7% from 1995 through 2005. Phosphate demand growth has accelerated from 1.9% to 3.8% per year and potash demand growth has increased from 2.3% to 4.9% per year between these same two periods.
Global grain and oilseed stocks remain at low levels despite record crops in 2007 and 2008. The latest USDA statistics released on July 11, 2008 show that inventories of the sixteen leading grain and oilseed crops will increase a measly 4.4 million tonnes this year and stocks as a percentage of use will decline to the lowest level since the early 1970s. The supply response to high agricultural commodity prices during the last two growing seasons was good, but clearly not good enough to reverse the unsustainable trend in global grain and oilseed stocks.
Increasing yields is a key to meeting the world's accelerating demands for food and fuel. Yields today are growing at the slowest rates in 35 years. For example, from 1970 to 1990, the average world wheat yield grew at a compound annual rate of 2.6 percent. This rate slowed to 1.1 percent during the 1990s and has slowed further to 0.7 percent during this decade. The trends are similar for corn, rice and soybeans. The proper use of crop nutrients can boost yields per acre by as much as a third. Yet, many essential crop nutrients have not been utilized adequately, particularly in developing countries. Improved application rates in these regions could boost production.
"We believe crop nutrients are now more essential than ever. They play a critical role in optimizing crop yields, helping meet the world's surging demand for food, feed, fiber and fuel," said Jim Prokopanko. "We are committed to doing our part in producing and supplying crop nutrients, fulfilling our mission to help the world grow the food it needs, and believe our improved financial flexibility provides us many options for our future growth."
Financial Guidance - Fiscal 2009
Sales volumes for the Phosphates segment are expected to range from 9.0 to 9.4 million tonnes for fiscal 2009. This increase is contingent upon sourcing an adequate supply of sulfur, operating mine and plant sites at high operating rates, and restarting certain previously indefinitely closed phosphoric and sulfuric acid production in the second half of the fiscal year. The restart of this phosphoric and sulfuric acid production will permit Mosaic to utilize excess granulation capacity at one of its existing plants.
Potash segment sales volumes are expected to range from 8.2 to 8.6 million tonnes in fiscal 2009. Previously announced potash capacity expansion projects will be underway in fiscal 2009; however, production from the first of the expansions will not come online until fiscal 2010. This volume estimate assumes, among other things, operating the potash facilities at high operating rates and continued successful management of the brine inflow at the Esterhazy mine. Mosaic is beginning fiscal 2009 with extremely low inventory levels, especially in Potash, compared with the inventory levels a year earlier. This will make it difficult to achieve increased sales volumes in fiscal 2009.
Mosaic's realized DAP price, FOB plant, for the first quarter of fiscal 2009 is estimated to be $1,020 to $1,080 per tonne. Partially offsetting the benefit of these higher projected prices will be higher raw material costs, principally ammonia and sulfur. Mosaic's first quarter fiscal 2009 average realized MOP price, FOB plant, is estimated to be $460 to $510 per tonne. Partially offsetting the benefit of these higher projected selling prices will be higher Canadian resource taxes and royalties. Both estimates assume farmer economics remain robust and that management has accurately estimated the mix of forward versus spot sales.
Canadian resource taxes and royalties for fiscal 2009 are estimated to range from $700 million to $1 billion due to the expected increases in the Potash segment's profitability and product selling prices. Management's estimate of the resource tax and royalties requires management to make significant assumptions about a number of matters, primarily projected selling prices and volumes, capital spending and foreign currency exchange rates. Canadian resource taxes and royalties are included as a component of cost of goods sold. These taxes and royalties approximated $361.8 million in fiscal 2008 and $154.1 million in fiscal 2007.
Capital spending for fiscal 2009 will grow significantly to a range of $900 million to $1.1 billion. Mosaic will undertake high return capital projects as well as invest substantial funds to ensure that existing plants and mines operate at peak levels. These projects include Mosaic's major multi-year potash capacity expansions and phosphate capacity expansions and cost reduction initiatives.
SG&A is estimated to range from $360 million to $390 million in fiscal 2009 and the effective income tax rate is estimated in the low to mid 30% range for the year.
Action In Food, Coal And Chemicals
New York - Concerns Cropping Up: One of the names we have long recommended in the fertilizer space is Agrium (nyse: AGU - news - people ). The company is involved in the production of agricultural nutrients like sulfur, nitrogen, nitrates, phosphates and potash. The company is also a direct seller of these products, and owns several nitrogen plants.
One of the reasons for our concern regarding Agrium is the recent drop in share prices. The stock price has dropped 30% in the last month, and after a gigantic 1100% gain in the last five years, we are wondering if this may be the end of a glorious run for this stock.
Looking for the best dividend-paying stocks? Check out Dividend.com's comprehensive dividend stock rankings.
We still like the fertilizer sector as much as any of the other commodity-related areas, but investors must be aware that AGU has had a huge run. Earnings will be out Aug. 6, and the stock may be setting up for a sell on the news reaction. We think investors that have had a big run in the name may want to just be prepared in the event the reaction may not go so well. Get a game plan ready for your investment. We reduced our rating on Agrium a bit recently, but it still qualifies as a "recommended" name for now.
We will be analyzing the news in the fertilizer sector closely, because we know this is a popular area of interest for investors, and especially for "hot money" traders.
Agrium holds a Dividend.com rating of 3.5 out of five stars.
Special Offer: Bold investors earn their biggest rewards when there's blood in the street and bankruptcy in the air. Click here for a 30-day free trial of Distressed Debt Securities newsletter for advice on smart and timely buys of distressed income securities, including auto suppliers and media companies.
Kraft's Profit Whip: Kraft Foods (nyse: KFT - news - people ) reported a nearly 21% jump in sales for this past quarter. The numbers include gains from weaker American currency and from a recent acquisition. The company's sales numbers were also padded by price raises made during the quarter.
Market share losses were an issue for Kraft, which management said was a result of competitors lagging behind in raising prices. We're not sure if this trend's going to change. Kraft management has to realize their cost structure is very high, and the smaller plays may use price as a way to pick up new customers.
For dividend investors, we think buying Kraft Foods under $30 is a good place to start accumulating a position in this food and beverage industry giant. We have decided to include Kraft Foods on our "Recommended" list. Kraft Foods has a dividend yield of 3.68% and has a Dividend.com rating of 3.5 out of five stars.
Profits, Sunny-Side Up: Cal-Maine Foods (nasdaq: CALM - news - people ) was the beneficiary of high egg prices and strong demand for eggs in the most recent quarter. Revenue rose nearly 39% to $235.6 million from $169.9 million.
The company has actually been benefiting from the rising cost of corn, which is used for chicken feed, since it simply passes higher prices onto customers. Lower supply levels have also helped secure better pricing.
Investors need to be aware that the price of eggs can be (and has been) very volatile. This price action can swing Cal-Maine shares very quickly, as the company's bottom line is directly affected by movements up or down, as is its variable dividend. We currently recommend Cal-Maine shares, but we do caution investors to keep a small position here. We would certainly not "put all our eggs in one basket."
Cal-Maine shares yield 8.64%, though dividends paid are based on annual profits. Cal-Maine holds a Dividend.com rating of 3.5 out of five stars.
Chicken Feed Getting More Expensive Than Chickens: Tyson Foods (nyse: TSN - news - people ) reported a big drop in quarterly profit. The company lost one cent per share, well below analysts' consensus forecast for a profit of 12 cents per share. Grain costs in the chicken business were up $140 million in the quarter. Sales rose about 3%.
Beef and pork, which account for about 57% of the company's revenue, were the bright spots, helping offset what would have been an even tougher quarter. Prepared foods, which account for 10% of Tyson's revenue, were affected by higher costs for wheat, dairy and cooking ingredients.
For dividend investors, we think Tyson Foods is not super attractive at its current levels. The stock price is toward the middle of its 52-week trading range of $13 to $22. The dividend yield is .99%, and that is nothing to "cluck" about. We'd re-examine the shares at lower levels.
Tyson Foods holds a Dividend.com rating of 3.3 out of 5 stars.
Special Offer: Click here for a free trial of Block Traders' Oil and Gold Monitor with detailed forecasts, risk-reward rankings and specific recommended trades for energy and precious metals stocks.
Cashing in the Coal Chips: Arch Coal (nyse: ACI - news - people ) is giving investors and "hot" money traders a chance to lock in some profits. The company reported a 30% rise in revenue for the quarter on Friday, and it is also raising its profit estimates to a range of $2.50 to $2.85 a share, from a prior forecast of $2.40 and $2.80 a share. Consensus estimates are for $2.64.
At this point, we believe that rallies in coal stocks are opportunities to lighten up on positions. The global slowdown will begin to hit the commodity areas, and softening oil prices will make coal plays a tough area for investors to make money in.
Arch Coal has a dividend yield of .55%, and is not recommended at this time, holding a Dividend.com rating of 3.4 out of five stars.
Cautious Guidance An Opportunity to Buy: Eastman Chemical (nyse: EMN - news - people ) delivered a second-quarter report that was essentially in-line with what Wall Street analysts had been expecting. The company sees the next quarter as being flat compared to last year's numbers with a slow U.S. economy and rising raw material and energy costs lending the cautious tone. Eastman stock took a big hit.
We think this sell-off may be a mistake, considering the recent Dow Chemical (nyse: DOW - news - people ) offer to buy Rohm & Haas (nyse: ROH - news - people ) for a 70% premium. We consider shares of Eastman Chemical a good risk/reward at these levels. The company also has a 2.68% dividend yield, and it is a "recommended" dividend stock, currently holding a Dividend.com rating of 3.5 out of five stars.
One of the reasons for our concern regarding Agrium is the recent drop in share prices. The stock price has dropped 30% in the last month, and after a gigantic 1100% gain in the last five years, we are wondering if this may be the end of a glorious run for this stock.
Looking for the best dividend-paying stocks? Check out Dividend.com's comprehensive dividend stock rankings.
We still like the fertilizer sector as much as any of the other commodity-related areas, but investors must be aware that AGU has had a huge run. Earnings will be out Aug. 6, and the stock may be setting up for a sell on the news reaction. We think investors that have had a big run in the name may want to just be prepared in the event the reaction may not go so well. Get a game plan ready for your investment. We reduced our rating on Agrium a bit recently, but it still qualifies as a "recommended" name for now.
We will be analyzing the news in the fertilizer sector closely, because we know this is a popular area of interest for investors, and especially for "hot money" traders.
Agrium holds a Dividend.com rating of 3.5 out of five stars.
Special Offer: Bold investors earn their biggest rewards when there's blood in the street and bankruptcy in the air. Click here for a 30-day free trial of Distressed Debt Securities newsletter for advice on smart and timely buys of distressed income securities, including auto suppliers and media companies.
Kraft's Profit Whip: Kraft Foods (nyse: KFT - news - people ) reported a nearly 21% jump in sales for this past quarter. The numbers include gains from weaker American currency and from a recent acquisition. The company's sales numbers were also padded by price raises made during the quarter.
Market share losses were an issue for Kraft, which management said was a result of competitors lagging behind in raising prices. We're not sure if this trend's going to change. Kraft management has to realize their cost structure is very high, and the smaller plays may use price as a way to pick up new customers.
For dividend investors, we think buying Kraft Foods under $30 is a good place to start accumulating a position in this food and beverage industry giant. We have decided to include Kraft Foods on our "Recommended" list. Kraft Foods has a dividend yield of 3.68% and has a Dividend.com rating of 3.5 out of five stars.
Profits, Sunny-Side Up: Cal-Maine Foods (nasdaq: CALM - news - people ) was the beneficiary of high egg prices and strong demand for eggs in the most recent quarter. Revenue rose nearly 39% to $235.6 million from $169.9 million.
The company has actually been benefiting from the rising cost of corn, which is used for chicken feed, since it simply passes higher prices onto customers. Lower supply levels have also helped secure better pricing.
Investors need to be aware that the price of eggs can be (and has been) very volatile. This price action can swing Cal-Maine shares very quickly, as the company's bottom line is directly affected by movements up or down, as is its variable dividend. We currently recommend Cal-Maine shares, but we do caution investors to keep a small position here. We would certainly not "put all our eggs in one basket."
Cal-Maine shares yield 8.64%, though dividends paid are based on annual profits. Cal-Maine holds a Dividend.com rating of 3.5 out of five stars.
Chicken Feed Getting More Expensive Than Chickens: Tyson Foods (nyse: TSN - news - people ) reported a big drop in quarterly profit. The company lost one cent per share, well below analysts' consensus forecast for a profit of 12 cents per share. Grain costs in the chicken business were up $140 million in the quarter. Sales rose about 3%.
Beef and pork, which account for about 57% of the company's revenue, were the bright spots, helping offset what would have been an even tougher quarter. Prepared foods, which account for 10% of Tyson's revenue, were affected by higher costs for wheat, dairy and cooking ingredients.
For dividend investors, we think Tyson Foods is not super attractive at its current levels. The stock price is toward the middle of its 52-week trading range of $13 to $22. The dividend yield is .99%, and that is nothing to "cluck" about. We'd re-examine the shares at lower levels.
Tyson Foods holds a Dividend.com rating of 3.3 out of 5 stars.
Special Offer: Click here for a free trial of Block Traders' Oil and Gold Monitor with detailed forecasts, risk-reward rankings and specific recommended trades for energy and precious metals stocks.
Cashing in the Coal Chips: Arch Coal (nyse: ACI - news - people ) is giving investors and "hot" money traders a chance to lock in some profits. The company reported a 30% rise in revenue for the quarter on Friday, and it is also raising its profit estimates to a range of $2.50 to $2.85 a share, from a prior forecast of $2.40 and $2.80 a share. Consensus estimates are for $2.64.
At this point, we believe that rallies in coal stocks are opportunities to lighten up on positions. The global slowdown will begin to hit the commodity areas, and softening oil prices will make coal plays a tough area for investors to make money in.
Arch Coal has a dividend yield of .55%, and is not recommended at this time, holding a Dividend.com rating of 3.4 out of five stars.
Cautious Guidance An Opportunity to Buy: Eastman Chemical (nyse: EMN - news - people ) delivered a second-quarter report that was essentially in-line with what Wall Street analysts had been expecting. The company sees the next quarter as being flat compared to last year's numbers with a slow U.S. economy and rising raw material and energy costs lending the cautious tone. Eastman stock took a big hit.
We think this sell-off may be a mistake, considering the recent Dow Chemical (nyse: DOW - news - people ) offer to buy Rohm & Haas (nyse: ROH - news - people ) for a 70% premium. We consider shares of Eastman Chemical a good risk/reward at these levels. The company also has a 2.68% dividend yield, and it is a "recommended" dividend stock, currently holding a Dividend.com rating of 3.5 out of five stars.
Friday, July 25, 2008
No Peak in Sight for Potash
That fever I told you about? The world's farmers have still got it.
I'm talking about the demand for fertilizer, and potash in particular. Unlike a certain unfortunate footwear maker, this is no fad, Fools.
Farmers are suddenly flush, and as long as they keep getting strong prices for their products, they have an incentive to increase plantings. Fertilizer is a small part of the overall cost of farming, and it provides a lot of bang for the buck. Yara International, the Nokia (NYSE: NOK) of nitrogen, puts the plant energy impact at 10 to 15 times that required to produce, transport, and apply the fertilizers it sells.
PotashCorp (NYSE: POT) is sitting on the stuff with the most attractive supply/demand picture of all. That's potash, or potassium carbonate. Last quarter, the company's potash segment raked in over $500 million in gross margin, or sales net of selling costs. This time around, that figure lifted to $886 million, nearly matching the entire 2007 contribution.
The crazy thing is that realized potash prices in the quarter, at a little over $400 per metric ton, were a mere fraction of where prices stand today. In April, after a drawn-out negotiation, China signed on for a $400 per ton increase. There's simply much more cash to be made in potash. The supply constraints are just that substantial.
I used to think that the valuations on guys like PotashCorp and Mosaic (NYSE: MOS) were a little nutty. When the former company backed up the truck upon a share price pullback to $120, I started to reconsider. Now it's rather plain that these potash players, and possibly even Intrepid Potash (NYSE: IPI), aren't particularly pricey. Three months ago, the average analyst estimate for PotashCorp's 2009 earnings was around $12.70, and now it's north of $20. I'm glad I'm not the only one that's a little slow on the uptake
I'm talking about the demand for fertilizer, and potash in particular. Unlike a certain unfortunate footwear maker, this is no fad, Fools.
Farmers are suddenly flush, and as long as they keep getting strong prices for their products, they have an incentive to increase plantings. Fertilizer is a small part of the overall cost of farming, and it provides a lot of bang for the buck. Yara International, the Nokia (NYSE: NOK) of nitrogen, puts the plant energy impact at 10 to 15 times that required to produce, transport, and apply the fertilizers it sells.
PotashCorp (NYSE: POT) is sitting on the stuff with the most attractive supply/demand picture of all. That's potash, or potassium carbonate. Last quarter, the company's potash segment raked in over $500 million in gross margin, or sales net of selling costs. This time around, that figure lifted to $886 million, nearly matching the entire 2007 contribution.
The crazy thing is that realized potash prices in the quarter, at a little over $400 per metric ton, were a mere fraction of where prices stand today. In April, after a drawn-out negotiation, China signed on for a $400 per ton increase. There's simply much more cash to be made in potash. The supply constraints are just that substantial.
I used to think that the valuations on guys like PotashCorp and Mosaic (NYSE: MOS) were a little nutty. When the former company backed up the truck upon a share price pullback to $120, I started to reconsider. Now it's rather plain that these potash players, and possibly even Intrepid Potash (NYSE: IPI), aren't particularly pricey. Three months ago, the average analyst estimate for PotashCorp's 2009 earnings was around $12.70, and now it's north of $20. I'm glad I'm not the only one that's a little slow on the uptake
Thursday, July 24, 2008
Potash Profits Triple On Fertilizer Need, Guidance Raised
Potash Corp. of Saskatchewan (NYSE:POT - News) kept up its explosive growth, crushing second-quarter views Thursday as surging demand buoyed prices for its fertilizers.
The fertilizer giant earned $2.82 a share, up 220% vs. a year earlier and 21 cents above Wall Street forecasts. Revenue climbed 94% to $2.62 billion. The firm also raised its 2008 earnings guidance.
But shares fell 3%, extending recent declines after skyrocketing 819% from its June 2006 low to last month's peak.
The world's largest fertilizer company by capacity, Potash produces the three primary plant nutrients. It's No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.
"We are experiencing strong growth in demand and are capturing the value of higher prices in all three nutrients, especially in potash," said CEO Bill Doyle in a statement.
Fertilizer demand has remained strong amid the global need to up food production.
"There's intense global pressure to expand food production, which has led to this unbelievable surge in the purchasing of fertilizer," said Tom Stundza, executive editor of Purchasing magazine. "Limited supplies in China and India have made North American potash a prime commodity. It's obvious that demand is growing faster than supply increases."
Potash is the company's biggest earnings contributor. The product generated close to half of the company's 2007 gross margin.
In the second quarter, potash gross profit soared 240%, reflecting higher prices. The average potash price rose 122% in North America and surged 192% offshore.
"Clearly there's limited supply and tremendous demand for potash," said Charlie Rentschler, a vice president at Wall Street Access.
"These people are in the catbird seat. They control most of the new capacity being brought on for potash."
Separately, Brazilian oilseed processor and fertilizer producer Bunge (NYSE:BG - News) on Thursday topped second-quarter views, lifted by the same high demand and prices for agricultural products.
Potash Corp. has been enjoying a nice run. Sales and earnings growth has accelerated the past three quarters. Still, the stock has been trending lower the past several weeks.
"Recently I've noticed a lot of rotational shifts by portfolio managers out of the basic materials and fertilizers group and into the financials and retailers," said Bill Selesky, an analyst with Argus Research.
Selesky sees no slowdown in Potash's sales and earnings growth as it continues to benefit from strong demand for fertilizer.
"With revenue growth being so strong and the company having such a low-cost operation, it's been able to take sales results and turn them into better-than-average earnings per share growth," he said.
Like many agriculture-related firms, Potash Corp. is riding the wave of high crop prices.
In the second quarter, corn prices leapt more than 60% vs. a year earlier while soybean prices almost doubled. Soaring crop prices have provided farmers with record income and strong motivation to increase yields and acreage planted, says CEO Doyle.
"At the end of the day it's all about what they can extract from the people they sell to," added Michael Swanson, senior economist at Wells Fargo & Co. "Clearly, the market it's selling to can afford to pay much higher prices for nitrogen, potash and phosphate."
Selesky says the prospects for Potash Corp. remain bright.
"Even a global economic slowdown wouldn't affect food production or consumption too much," he said.
"We're seeing a lot of food production growth in many emerging economies. As local economies improve and people make more money, they'll get better diets and have better housing."
These trends should continue to play well for fertilizer companies, he adds.
"I don't see why it wouldn't continue its winning streak with these prices," said Rentschler.
The fertilizer giant earned $2.82 a share, up 220% vs. a year earlier and 21 cents above Wall Street forecasts. Revenue climbed 94% to $2.62 billion. The firm also raised its 2008 earnings guidance.
But shares fell 3%, extending recent declines after skyrocketing 819% from its June 2006 low to last month's peak.
The world's largest fertilizer company by capacity, Potash produces the three primary plant nutrients. It's No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.
"We are experiencing strong growth in demand and are capturing the value of higher prices in all three nutrients, especially in potash," said CEO Bill Doyle in a statement.
Fertilizer demand has remained strong amid the global need to up food production.
"There's intense global pressure to expand food production, which has led to this unbelievable surge in the purchasing of fertilizer," said Tom Stundza, executive editor of Purchasing magazine. "Limited supplies in China and India have made North American potash a prime commodity. It's obvious that demand is growing faster than supply increases."
Potash is the company's biggest earnings contributor. The product generated close to half of the company's 2007 gross margin.
In the second quarter, potash gross profit soared 240%, reflecting higher prices. The average potash price rose 122% in North America and surged 192% offshore.
"Clearly there's limited supply and tremendous demand for potash," said Charlie Rentschler, a vice president at Wall Street Access.
"These people are in the catbird seat. They control most of the new capacity being brought on for potash."
Separately, Brazilian oilseed processor and fertilizer producer Bunge (NYSE:BG - News) on Thursday topped second-quarter views, lifted by the same high demand and prices for agricultural products.
Potash Corp. has been enjoying a nice run. Sales and earnings growth has accelerated the past three quarters. Still, the stock has been trending lower the past several weeks.
"Recently I've noticed a lot of rotational shifts by portfolio managers out of the basic materials and fertilizers group and into the financials and retailers," said Bill Selesky, an analyst with Argus Research.
Selesky sees no slowdown in Potash's sales and earnings growth as it continues to benefit from strong demand for fertilizer.
"With revenue growth being so strong and the company having such a low-cost operation, it's been able to take sales results and turn them into better-than-average earnings per share growth," he said.
Like many agriculture-related firms, Potash Corp. is riding the wave of high crop prices.
In the second quarter, corn prices leapt more than 60% vs. a year earlier while soybean prices almost doubled. Soaring crop prices have provided farmers with record income and strong motivation to increase yields and acreage planted, says CEO Doyle.
"At the end of the day it's all about what they can extract from the people they sell to," added Michael Swanson, senior economist at Wells Fargo & Co. "Clearly, the market it's selling to can afford to pay much higher prices for nitrogen, potash and phosphate."
Selesky says the prospects for Potash Corp. remain bright.
"Even a global economic slowdown wouldn't affect food production or consumption too much," he said.
"We're seeing a lot of food production growth in many emerging economies. As local economies improve and people make more money, they'll get better diets and have better housing."
These trends should continue to play well for fertilizer companies, he adds.
"I don't see why it wouldn't continue its winning streak with these prices," said Rentschler.
Fertilizers Grow On Wall Street
Investors are reaping profits from the fertile agribusiness sector, which saw a spate of soaring earnings reports on Thursday--the likes of which are expected to continue, judging by generous guidance hikes by fertilizer companies.
The bullish outlooks seem to belie the idea that the world is headed for a sharp slowdown. While conditions in the United States and Europe seem weak, a lot of farmer are making bad bets if they are ordering fertilizers for crops that won't be wanted.
Commodity prices have soared in the past year as the world's population grows and becomes wealthier, enabling emerging middle-class consumers in developing markets to spend more on food. These consumers aren't only buying more food but also spending on higher quality nutrition like meat, which drives up grain demand by way of animal feed. According to Potash Corp. of Saskatchewan (nyse: POT - news - people ), corn prices surged more than 60.0% and soybean prices nearly doubled during the second quarter.
As a result, farmers are scrambling to boost crop yields and piling on the fertilizer, which restores nutrients that sapped out of the soil during the previous planting season. But Potash said global crop yields will need to reach record highs not only to meet growing demand but also to replace depleted grain stockpiles, which are down to less than two months of supply.
"That presents farmers with a significant challenge--one that becomes greater as population covers a larger portion of the world's agricultural spaces, leaving less land for food production," the company said.
Bunge (nyse: BG - news - people ), which manufactures oilseed products in addition to animal feed and fertilizer, boosted year-end earnings guidance by more than 60.0% on Thursday.
"While growth in demand for some agricultural products may soften slightly due to the sustained period of high prices, agribusiness margins should be solid. Edible oils should improve from its performance in this quarter," said Chief Financial Officer Jacqualyn Fouse, adding fundamentals in the company's fertilizer business are projected to remain strong. Bunge boosted full-year earnings guidance to between $11.60 and $11.90 from $7.10 to $7.40. Analysts had been expecting earnings of $9.16 a share.
Bunge said earnings more than quadrupled in the second quarter, soaring to $751.0 million, or $5.45 a share, from $168.0 million, or $1.30 a share, a year ago. The second quarter included $128.0 million in tax credits from a favorable tax ruling in Brazil. Earnings, adjusted to exclude non-recurring items, came in at $4.73 a share.
The results beat analysts' expectations for $2.27 a share; second-quarter sales of $14.4 billion, up 73.1% from last year, also surpassed the $13.3 billion in sales projected by analysts. Its shares gained 84 cents, or 0.9%, to $100.16, during afternoon trading in New York.
Potash Corp. of Saskatchewan said higher prices for potash, nitrogen and phosphate helped profits more than triple, to $905.1 million, or $2.82 a share, from $285.7 million, or 88 cents a share, a year ago. Sales jumped 93.7%, to $2.6 billion, from $1.4 billion, in 2007's second quarter.
Analysts had predicted earnings of $2.61 a share and sales of $2.6 billion. The fertilizer-and-animal-feed company boosted year-end earnings guidance to between $12 and $13 a share, from $9.50 to $10.50, and it said third-quarter earnings will be between $3.25 and $3.75 a share. Its stock was down by 0.1%, or 26 cents, at $200.43.
Terra Nitrogen (nyse: TNH - news - people ), a major U.S. producer of nitrogen fertilizer products, said second-quarter net income more than doubled, to $130.2 million, or $4.01 a share, from $57.1 million, or $3.02 a share, in the prior year. Sales surged 44.7%, to $256.7 million, from $177.4 million.
The company attributed the strong earnings to higher selling prices for nitrogen and soaring ammonia sales volumes, despite lower sales for some products as a result of flooding in the Midwest, which reduced U.S. corn planting by 6.0%. Its stock added 3.9%, or $4.26, to $112.30.
Anglo-Swiss agribusiness leader Syngenta (nyse: SYT - news - people ) also beat expectations with its half-year results on Thursday, and raised its earnings outlook right into 2009. Analysts said the company had until then been conservative with its forecasts. (See "Syngenta: A Place To Plant Investment")
The bullish outlooks seem to belie the idea that the world is headed for a sharp slowdown. While conditions in the United States and Europe seem weak, a lot of farmer are making bad bets if they are ordering fertilizers for crops that won't be wanted.
Commodity prices have soared in the past year as the world's population grows and becomes wealthier, enabling emerging middle-class consumers in developing markets to spend more on food. These consumers aren't only buying more food but also spending on higher quality nutrition like meat, which drives up grain demand by way of animal feed. According to Potash Corp. of Saskatchewan (nyse: POT - news - people ), corn prices surged more than 60.0% and soybean prices nearly doubled during the second quarter.
As a result, farmers are scrambling to boost crop yields and piling on the fertilizer, which restores nutrients that sapped out of the soil during the previous planting season. But Potash said global crop yields will need to reach record highs not only to meet growing demand but also to replace depleted grain stockpiles, which are down to less than two months of supply.
"That presents farmers with a significant challenge--one that becomes greater as population covers a larger portion of the world's agricultural spaces, leaving less land for food production," the company said.
Bunge (nyse: BG - news - people ), which manufactures oilseed products in addition to animal feed and fertilizer, boosted year-end earnings guidance by more than 60.0% on Thursday.
"While growth in demand for some agricultural products may soften slightly due to the sustained period of high prices, agribusiness margins should be solid. Edible oils should improve from its performance in this quarter," said Chief Financial Officer Jacqualyn Fouse, adding fundamentals in the company's fertilizer business are projected to remain strong. Bunge boosted full-year earnings guidance to between $11.60 and $11.90 from $7.10 to $7.40. Analysts had been expecting earnings of $9.16 a share.
Bunge said earnings more than quadrupled in the second quarter, soaring to $751.0 million, or $5.45 a share, from $168.0 million, or $1.30 a share, a year ago. The second quarter included $128.0 million in tax credits from a favorable tax ruling in Brazil. Earnings, adjusted to exclude non-recurring items, came in at $4.73 a share.
The results beat analysts' expectations for $2.27 a share; second-quarter sales of $14.4 billion, up 73.1% from last year, also surpassed the $13.3 billion in sales projected by analysts. Its shares gained 84 cents, or 0.9%, to $100.16, during afternoon trading in New York.
Potash Corp. of Saskatchewan said higher prices for potash, nitrogen and phosphate helped profits more than triple, to $905.1 million, or $2.82 a share, from $285.7 million, or 88 cents a share, a year ago. Sales jumped 93.7%, to $2.6 billion, from $1.4 billion, in 2007's second quarter.
Analysts had predicted earnings of $2.61 a share and sales of $2.6 billion. The fertilizer-and-animal-feed company boosted year-end earnings guidance to between $12 and $13 a share, from $9.50 to $10.50, and it said third-quarter earnings will be between $3.25 and $3.75 a share. Its stock was down by 0.1%, or 26 cents, at $200.43.
Terra Nitrogen (nyse: TNH - news - people ), a major U.S. producer of nitrogen fertilizer products, said second-quarter net income more than doubled, to $130.2 million, or $4.01 a share, from $57.1 million, or $3.02 a share, in the prior year. Sales surged 44.7%, to $256.7 million, from $177.4 million.
The company attributed the strong earnings to higher selling prices for nitrogen and soaring ammonia sales volumes, despite lower sales for some products as a result of flooding in the Midwest, which reduced U.S. corn planting by 6.0%. Its stock added 3.9%, or $4.26, to $112.30.
Anglo-Swiss agribusiness leader Syngenta (nyse: SYT - news - people ) also beat expectations with its half-year results on Thursday, and raised its earnings outlook right into 2009. Analysts said the company had until then been conservative with its forecasts. (See "Syngenta: A Place To Plant Investment")
Agriculture: Are There Still Bulls in the Supermarket?
You don't need me to tell you that, over the past six months, food prices have been climbing through the roof of your neighborhood grocery store. A combination of factors have brought food inflation upon us, including greater worldwide demand, isolated food shortages, weather and currency swings. The price of oil has also had an impact. Not only do higher fuel prices make farming and the transporting of foodstuffs more expensive, but the production of alternative fuels, such as ethanol, has also pushed up corn and other grain prices.
On Wall Street, the themes of food, feed and seed have been safe bets over the past six months, as the demand for all three have led to the sharp rise in agricultural and commodity prices. Investors have been pushing higher the stocks of seed producers like Monsanto (NYSE: MON) and fertilizer makers like Potash Corp. (NYSE: POT) and Mosaic (NYSE: MOS). In the index world, indexes that track agricultural commodities have been on a nearly uninterrupted climb. The benchmark Dow Jones AIG Commodity Index is typical of the year-to-date trend.
The problem with using the Dow Jones AIG Index to represent agricultural performance is that the index is too broad. It includes all commodities, including energy, petroleum, precious metals, grains, livestock and agriculture. Fortunately, to hone in on the agricultural components, Dow Jones gave us subindexes that are focused on single agricultural products. The subindexes are a bit harder to get data on, but we are able to dig up charts that show us how robust the recent agricultural track record has been. Here's the one-year chart of the Dow Jones AIG Soybean Oil Sub-index [DJAIGBO]:
Likewise, the Dow Jones AIG Corn Sub-index shows how the May floods in the Midwest, and the demand for corn-based ethanol, have pushed the price of corn higher.
What's With Wheat?
The wheat market has been a little more interesting, and is not a carbon copy of the other agricultural indices. A few weeks ago I wrote a piece on the lack of "convergence" (futures and cash prices coming together) in the wheat market. Factors such as sharply higher barge rates (the price of actually shipping the commodity); high futures valuations; and a large carry in the futures markets (the costs of actually holding a physical commodity, e.g., for insurance, storage and interest) explain why the price of spot wheat often trades askew from the price of wheat in the futures markets. These same factors may explain why the Dow Jones AIG wheat sub-index has a flatter one-year chart than the other agricultural indexes
Will the bull market in agriculture and agribusiness continue for the rest of 2008 and beyond? The charts of most agricultural indexes have topped off this past month, and have even dipped, indicating a potential retreat. For investors in agricultural ETFs or futures indexes, one of the keys to the agricultural commodity markets over the next six months will be the weather. In recent days, corn and soybeans fell to the lowest point in six weeks on speculation that warm, wet weather will hasten plant development and boost the yield potential of the two crops. As we've known since we planted our first tomatoes in the backyard, excessive dry spells are bad for crops. Since severe heat in the nation's heartland is not forecast from now until the end of August, we should expect our farms to be more bountiful. So agricultural investors should anticipate greater supply, and with increased supply comes lower prices.
Corn prices are a prime example of where the market may be heading in the near future, because of better weather. Corn has plunged 20% in the past month, driven lower by ideal growing weather in the U.S. Corn Belt, and a big drop in oil prices. Corn had soared to nearly $8 a bushel in June as the Midwest was ravaged by floods, but the return to warmer, dryer (but not too dry) weather has revived crops, and corn is now down to $6 a bushel.
Agricultural indexes may also fall on speculation that investor demand for agricultural commodities may decline as global equity markets rise and energy prices fall from their highs. In fact, investors are already starting to shift their positions. According to Bloomberg News, hedge fund managers and other large speculators cut their net-long futures position by 11% in Chicago corn futures in the week ended July 15. Index funds that invest in a basket of commodities cut net long positions by 2.3%. Hedge funds and other large speculators also cut net-long positions in soybean futures by 0.4%, in the week ended July 15, also according to Bloomberg.
Furthermore, cotton, a major agricultural market, is down more than 7% in July alone, but that's a typical summer pattern, reflecting lower demand. Prices from now until year end may rebound if the weather becomes too hot and dry in India, a major cotton-growing country, or in the growing regions of the U.S., such as Texas, the largest cotton-producing state.
There's one other issue that might suggest further downward sledding in the agricultural markets. Agricultural futures may be the most vulnerable of the U.S. commodity markets to proposed limits on speculative trading that are being considered by the government. Lawmakers are reviewing several bills to curb excessive speculation that they blame for surging commodity prices. In a recent report, Barclays Capital said that agricultural futures markets are the most susceptible to forced trading conditions because they are small relative to the size of index holdings.
Six-Month Forecast
So the forecast for the next six months is for a pullback in agricultural markets. But what if we look beyond 2008, at the real long term, i.e., the next 10 years? The UN Food and Agriculture Organization [FAO], the definitive body when it comes to worldwide agriculture, has already looked out over the long-term horizon and concluded that we're in for a prolonged period of food inflation. They recently released a study saying that agricultural commodity prices should ease from their recent record peaks, but over the next 10 years, they are expected to average well above their mean levels of the past decade. They forecast that real prices will increase from less than 10% for rice and sugar, to under 20% for wheat, to around 30% for grains and oilseeds.
The FAO report also said that food prices may become more volatile because stock levels are expected to remain low, hedge funds will continue to actively trade and speculate in commodity futures markets, and climate change will affect crop production and supply in unforeseen ways. The FAO is less concerned about drought conditions, which are temporary, and more concerned about the cumulative effect of high oil prices, the demand for biofuel, changing diets, urbanization, economic growth and expanding populations.
We are definitely in the midst of a breather from a raging bull market in agricultural commodities. Better weather for crop growing, a gradual migration by investors away from commodities, a healing stock market, and lower fuel costs have taken the froth out of agriculture. Investors should keep a close eye on these trends, because if they continue, then the next six months don't bode well for long positions in agricultural ETFs. But if the UN is right, then this is only a temporary respite, and the next six months may be remembered as only a hiccup in what will become a secular agricultural market beset by inflation and more challenging growing conditions..By Eli Neusner
On Wall Street, the themes of food, feed and seed have been safe bets over the past six months, as the demand for all three have led to the sharp rise in agricultural and commodity prices. Investors have been pushing higher the stocks of seed producers like Monsanto (NYSE: MON) and fertilizer makers like Potash Corp. (NYSE: POT) and Mosaic (NYSE: MOS). In the index world, indexes that track agricultural commodities have been on a nearly uninterrupted climb. The benchmark Dow Jones AIG Commodity Index is typical of the year-to-date trend.
The problem with using the Dow Jones AIG Index to represent agricultural performance is that the index is too broad. It includes all commodities, including energy, petroleum, precious metals, grains, livestock and agriculture. Fortunately, to hone in on the agricultural components, Dow Jones gave us subindexes that are focused on single agricultural products. The subindexes are a bit harder to get data on, but we are able to dig up charts that show us how robust the recent agricultural track record has been. Here's the one-year chart of the Dow Jones AIG Soybean Oil Sub-index [DJAIGBO]:
Likewise, the Dow Jones AIG Corn Sub-index shows how the May floods in the Midwest, and the demand for corn-based ethanol, have pushed the price of corn higher.
What's With Wheat?
The wheat market has been a little more interesting, and is not a carbon copy of the other agricultural indices. A few weeks ago I wrote a piece on the lack of "convergence" (futures and cash prices coming together) in the wheat market. Factors such as sharply higher barge rates (the price of actually shipping the commodity); high futures valuations; and a large carry in the futures markets (the costs of actually holding a physical commodity, e.g., for insurance, storage and interest) explain why the price of spot wheat often trades askew from the price of wheat in the futures markets. These same factors may explain why the Dow Jones AIG wheat sub-index has a flatter one-year chart than the other agricultural indexes
Will the bull market in agriculture and agribusiness continue for the rest of 2008 and beyond? The charts of most agricultural indexes have topped off this past month, and have even dipped, indicating a potential retreat. For investors in agricultural ETFs or futures indexes, one of the keys to the agricultural commodity markets over the next six months will be the weather. In recent days, corn and soybeans fell to the lowest point in six weeks on speculation that warm, wet weather will hasten plant development and boost the yield potential of the two crops. As we've known since we planted our first tomatoes in the backyard, excessive dry spells are bad for crops. Since severe heat in the nation's heartland is not forecast from now until the end of August, we should expect our farms to be more bountiful. So agricultural investors should anticipate greater supply, and with increased supply comes lower prices.
Corn prices are a prime example of where the market may be heading in the near future, because of better weather. Corn has plunged 20% in the past month, driven lower by ideal growing weather in the U.S. Corn Belt, and a big drop in oil prices. Corn had soared to nearly $8 a bushel in June as the Midwest was ravaged by floods, but the return to warmer, dryer (but not too dry) weather has revived crops, and corn is now down to $6 a bushel.
Agricultural indexes may also fall on speculation that investor demand for agricultural commodities may decline as global equity markets rise and energy prices fall from their highs. In fact, investors are already starting to shift their positions. According to Bloomberg News, hedge fund managers and other large speculators cut their net-long futures position by 11% in Chicago corn futures in the week ended July 15. Index funds that invest in a basket of commodities cut net long positions by 2.3%. Hedge funds and other large speculators also cut net-long positions in soybean futures by 0.4%, in the week ended July 15, also according to Bloomberg.
Furthermore, cotton, a major agricultural market, is down more than 7% in July alone, but that's a typical summer pattern, reflecting lower demand. Prices from now until year end may rebound if the weather becomes too hot and dry in India, a major cotton-growing country, or in the growing regions of the U.S., such as Texas, the largest cotton-producing state.
There's one other issue that might suggest further downward sledding in the agricultural markets. Agricultural futures may be the most vulnerable of the U.S. commodity markets to proposed limits on speculative trading that are being considered by the government. Lawmakers are reviewing several bills to curb excessive speculation that they blame for surging commodity prices. In a recent report, Barclays Capital said that agricultural futures markets are the most susceptible to forced trading conditions because they are small relative to the size of index holdings.
Six-Month Forecast
So the forecast for the next six months is for a pullback in agricultural markets. But what if we look beyond 2008, at the real long term, i.e., the next 10 years? The UN Food and Agriculture Organization [FAO], the definitive body when it comes to worldwide agriculture, has already looked out over the long-term horizon and concluded that we're in for a prolonged period of food inflation. They recently released a study saying that agricultural commodity prices should ease from their recent record peaks, but over the next 10 years, they are expected to average well above their mean levels of the past decade. They forecast that real prices will increase from less than 10% for rice and sugar, to under 20% for wheat, to around 30% for grains and oilseeds.
The FAO report also said that food prices may become more volatile because stock levels are expected to remain low, hedge funds will continue to actively trade and speculate in commodity futures markets, and climate change will affect crop production and supply in unforeseen ways. The FAO is less concerned about drought conditions, which are temporary, and more concerned about the cumulative effect of high oil prices, the demand for biofuel, changing diets, urbanization, economic growth and expanding populations.
We are definitely in the midst of a breather from a raging bull market in agricultural commodities. Better weather for crop growing, a gradual migration by investors away from commodities, a healing stock market, and lower fuel costs have taken the froth out of agriculture. Investors should keep a close eye on these trends, because if they continue, then the next six months don't bode well for long positions in agricultural ETFs. But if the UN is right, then this is only a temporary respite, and the next six months may be remembered as only a hiccup in what will become a secular agricultural market beset by inflation and more challenging growing conditions..By Eli Neusner
AG COMMODITIES STUMBLE AGAIN
Agricultural materials producers, thwarted by reduced prices for oil and agricultural commodities, accelerated their recent declines in Thursday’s trading. That’s contributed to the broad weakness in the equities market, as it’s deprived the averages of one of its stalwart groups of 2008. More frustratingly, it’s prevented some names from exploiting tremendously constructive quarterly results. Shares of Potash (POT) surrendered modest intraday gains, and amidst a choppy session, have moved back to opening levels. That’s given it little leverage to second-quarter earnings of $2.82 a share that beat forecasts by 21 cents. Its gross margins increased … by 240%. Fertilizer sales increased a little less than 100% on a year-over-year basis. It raised its forecast for the current quarter and the full year. Nevertheless, the price of corn has acted as the effective gatekeeper on investors’ reactions to the results. And corn prices in the commodities markets haven’t been very accommodative. In fact, corn prices have declined 24% in the futures market since the start of July. The declines in the energy market, where crude has retreated as much as $20 a barrel (to the bargain price of $120), has affected the outlook for other commodities. The rise in the dollar, also tied to the energy outlook, has contributed another stress point. Potash shares have declined 22% since the high on June 17. Other fertilizer makers have declined, as well. Agrium (AGU) lost 25% since its June 18 high. Mosiac (MOS) has fallen 30% in that time.
Terra Industries 2Q earnings nearly triple
Terra Industries 2nd-qtr profit nearly triples, sales jump; results beat Street, shares rally
NEW YORK (AP) -- Fertilizer manufacturer Terra Industries Inc. said Thursday its second-quarter profit nearly tripled and its revenue surged, results that beat Wall Street's estimates.
For the period ended June 30, the company posted income available to common shareholders of $202.2 million, or $1.94 per share, compared with $69.4 million, or 66 cents per share, in the year-ago period.
The figures exclude preferred stock dividends of about $1.3 million.
Revenue jumped 22 percent to $843.1 million from $692.5 million in the second quarter of last year.
Analysts polled by Thomson Financial expected, on average, earnings of $1.22 per share on revenue of $837.3 million
"We expect this strong demand to continue for the remainder of 2008 as customers fill their storage capacity in anticipation of a robust spring 2009 planting and application season," President and CEO Mike Bennett said in a statement.
Shares jumped $3.85, or 8.4 percent, to $49.49 in the afternoon session.
NEW YORK (AP) -- Fertilizer manufacturer Terra Industries Inc. said Thursday its second-quarter profit nearly tripled and its revenue surged, results that beat Wall Street's estimates.
For the period ended June 30, the company posted income available to common shareholders of $202.2 million, or $1.94 per share, compared with $69.4 million, or 66 cents per share, in the year-ago period.
The figures exclude preferred stock dividends of about $1.3 million.
Revenue jumped 22 percent to $843.1 million from $692.5 million in the second quarter of last year.
Analysts polled by Thomson Financial expected, on average, earnings of $1.22 per share on revenue of $837.3 million
"We expect this strong demand to continue for the remainder of 2008 as customers fill their storage capacity in anticipation of a robust spring 2009 planting and application season," President and CEO Mike Bennett said in a statement.
Shares jumped $3.85, or 8.4 percent, to $49.49 in the afternoon session.
Potash Corp. of Saskatchewan raises outlook
Fertilizer maker Potash Corp. of Saskatchewan raises outlook for 3Q, year, after strong 2Q
MINNEAPOLIS (AP) -- Potash Corp. of Saskatchewan Inc. on Thursday raised its full-year guidance as it reported second-quarter earnings that more than tripled from a year ago.
The fertilizer maker said it now expects to earn $12 to $13 per share for the year, up from a previous forecast of $9.50 to $10.50 per share.
It said it expects a third-quarter profit of $3.25 to $3.75 per share.
Analysts surveyed by Thomson Financial, on average, had been expecting a profit of $11.67 per share for the year and $3.27 per share for the third quarter.
In afternoon trading, Potash shares, which had been down earlier in the session, gained 22 cents, to $200.91.
MINNEAPOLIS (AP) -- Potash Corp. of Saskatchewan Inc. on Thursday raised its full-year guidance as it reported second-quarter earnings that more than tripled from a year ago.
The fertilizer maker said it now expects to earn $12 to $13 per share for the year, up from a previous forecast of $9.50 to $10.50 per share.
It said it expects a third-quarter profit of $3.25 to $3.75 per share.
Analysts surveyed by Thomson Financial, on average, had been expecting a profit of $11.67 per share for the year and $3.27 per share for the third quarter.
In afternoon trading, Potash shares, which had been down earlier in the session, gained 22 cents, to $200.91.
This Caterpillar Is Smokin
If you're at all down in the dumps about the economy, I have a possible elixir for you: Simply print out a copy of Caterpillar's (NYSE: CAT) earnings release, or its conference-call transcript, and put the document under your pillow. The positive vibes that will waft up into your body as you sleep will almost certainly have a profoundly positive effect.
Let's look at what I'm referring to: For the quarter, the company's income rose by more than a third -- 34%, to be precise -- over last year's figure. At $1.11 billion, it translated to $1.74 a share, from $823 million and $1.24 per share last year. OK, we’ll be picky: But for a tax benefit in the quarter, income would have risen "only" 29% and the per-share improvement would have been 35%, rather than 40%.
But the key here is that this is a company that -- like DuPont (NYSE: DD), for instance -- has been able to benefit from sustained growth in the developing world, along with its role in some pedal-to-the-metal industries. And it hasn't backed off a bit; it's kept up its pace despite the softness that you know about in North America, western Europe, and Japan.
The company hasn't merely been riding a wave of breakneck growth in certain industries or developing parts of the world. Sure, it's benefited from increasing commodities prices and frenetic activity in mining, for instance -- CEO Jim Owens specifically mentioned coal mining during his call -- but there are signs that it's being managed effectively, as well. For instance, Caterpillar's manufacturing costs were up just 1.5% in the second quarter. That's impressive, given the way inflation has been raising its ugly head.
Can this continue? Apparently it can. Management has raised its sales forecast for this year to an even $50 billion, from a $47.2 billion to $49.5 billion range. And it also nudged up its EPS guidance. Beyond that, many of Caterpillar's products are "production constrained," and, as Owen noted, "we are selling as much as we can make."
In the days and weeks ahead, I'll be awaiting the results from Caterpillar's fellow equipment maker Deere (NYSE: DE), along with mining or construction companies like Brazil's Vale (NYSE: RIO). I suspect that they'll point to strong demand for what they do, as well. And like Caterpillar, they may help me to sleep just a little better.
Let's look at what I'm referring to: For the quarter, the company's income rose by more than a third -- 34%, to be precise -- over last year's figure. At $1.11 billion, it translated to $1.74 a share, from $823 million and $1.24 per share last year. OK, we’ll be picky: But for a tax benefit in the quarter, income would have risen "only" 29% and the per-share improvement would have been 35%, rather than 40%.
But the key here is that this is a company that -- like DuPont (NYSE: DD), for instance -- has been able to benefit from sustained growth in the developing world, along with its role in some pedal-to-the-metal industries. And it hasn't backed off a bit; it's kept up its pace despite the softness that you know about in North America, western Europe, and Japan.
The company hasn't merely been riding a wave of breakneck growth in certain industries or developing parts of the world. Sure, it's benefited from increasing commodities prices and frenetic activity in mining, for instance -- CEO Jim Owens specifically mentioned coal mining during his call -- but there are signs that it's being managed effectively, as well. For instance, Caterpillar's manufacturing costs were up just 1.5% in the second quarter. That's impressive, given the way inflation has been raising its ugly head.
Can this continue? Apparently it can. Management has raised its sales forecast for this year to an even $50 billion, from a $47.2 billion to $49.5 billion range. And it also nudged up its EPS guidance. Beyond that, many of Caterpillar's products are "production constrained," and, as Owen noted, "we are selling as much as we can make."
In the days and weeks ahead, I'll be awaiting the results from Caterpillar's fellow equipment maker Deere (NYSE: DE), along with mining or construction companies like Brazil's Vale (NYSE: RIO). I suspect that they'll point to strong demand for what they do, as well. And like Caterpillar, they may help me to sleep just a little better.
Has the Commodity Bubble Popped?
To some investors it may already feel like something popped: The price of oil has fallen about 13% from its record high on July 11 to $127.50 a barrel. Some of the hot commodity stocks, such as coal miner Massey Energy Co. and fertilizer maker Mosaic Co., are down more than 20% in a matter of weeks, yet the former still trades at multiples comparable to Google’s.
The stocks have experienced a greater decline that traders in the space have become accustomed to, and the biggest percentage drop for oil since the summer of 2006. The latest rally in oil and gas, which began in February, has officially broken down.
Still, oil would have to fall another 20% to threaten its multiyear upward trend, according to one technical analyst. To rank with some of the great speculative crashes of history – Dutch tulips, say, or tech stocks in the early part of this decade, the commodities selloff would be just getting started. Proponents of the commodities trade say there are fundamental supply-and-demand factors underpinning the dizzying runups. Then again, so did defendants of the tech bubble.
After its peak in March 2000, the Standard & Poor’s 500 ground down slowly, taking until October 2002 to fall nearly 50% from the 1550s to about 800. The price of many commodities and commodities stocks — from gasoline to coal to fertilizer makers — rode up on the coattails of crude oil. So oil’s moves are pivotal. Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, said there’s good reason for a technician to believe oil’s retreat will continue in the near term.
“Since the peak, the down days have been on really heavy volume,” Detrick said. “The only day we had a bounce since the peak on July 11 was on July 21, and that was a very light volume day. You can almost make that statement for all commodities. There’s been a bounce here and there, but the selling without question has come on higher volume.”
The United States Oil Fund, an exchange-traded fund tied to the price of oil, recently traded near $103, off 39 cents. Mr. Detrick expects the fund to test the $100 level, where it bounced in June. Yet there are some ominous signs that the support won’t hold: The line tracing the 50-day moving average, which had been rising steadily since February, has now flattened out.
The stocks have experienced a greater decline that traders in the space have become accustomed to, and the biggest percentage drop for oil since the summer of 2006. The latest rally in oil and gas, which began in February, has officially broken down.
Still, oil would have to fall another 20% to threaten its multiyear upward trend, according to one technical analyst. To rank with some of the great speculative crashes of history – Dutch tulips, say, or tech stocks in the early part of this decade, the commodities selloff would be just getting started. Proponents of the commodities trade say there are fundamental supply-and-demand factors underpinning the dizzying runups. Then again, so did defendants of the tech bubble.
After its peak in March 2000, the Standard & Poor’s 500 ground down slowly, taking until October 2002 to fall nearly 50% from the 1550s to about 800. The price of many commodities and commodities stocks — from gasoline to coal to fertilizer makers — rode up on the coattails of crude oil. So oil’s moves are pivotal. Ryan Detrick, senior technical strategist at Schaeffer’s Investment Research, said there’s good reason for a technician to believe oil’s retreat will continue in the near term.
“Since the peak, the down days have been on really heavy volume,” Detrick said. “The only day we had a bounce since the peak on July 11 was on July 21, and that was a very light volume day. You can almost make that statement for all commodities. There’s been a bounce here and there, but the selling without question has come on higher volume.”
The United States Oil Fund, an exchange-traded fund tied to the price of oil, recently traded near $103, off 39 cents. Mr. Detrick expects the fund to test the $100 level, where it bounced in June. Yet there are some ominous signs that the support won’t hold: The line tracing the 50-day moving average, which had been rising steadily since February, has now flattened out.
Even After Pullback, Commodity Stocks Have Been This Year's Winners
The past few months have been incredibly challenging for many stocks, as few have been spared from indiscriminate selling. Despite this, there are several companies in the agricultural, mining, and energy sectors that have performed better than ever, generating impressive returns in the face of the market headwinds. Commodity-related businesses are generally seen to have strong long-term prospects as emerging markets increase their consumption, but a pullback has occurred of late after the long, steep run higher.
Sociedad Quimica y Minera (NYSE: SQM - News) is a large-cap chemical company based in Chile that has been able to double its stock price in the past year by riding the global commodities boom. Specifically, the company has benefited from rising demand for fertilizer and lithium, a key component of batteries in hybrid vehicles. While only one Pro investor included SQM among its top-15, U.S.-listed, equity holdings at the end of Q1, a large number of tickerspy members are tracking it in their portfolios. Of those, many are also tracking other large agriculture plays such as Potash (NYSE: POT - News), Mosaic (NYSE: MOS - News), and Agrium (NYSE: AGU - News).
CF Industries (NYSE: CF - News) is another large agricultural play that has shown remarkable growth despite yesterday's sharp pullback. The stock price has more than doubled in the last year as growing food demands in emerging markets combined with government mandates on crop-based biofuels to create a surge in demand for fertilizers. 18 Professional investors counted CF among their top-15, U.S.-listed, equity holdings at the end of Q1, including hedge fund giant Citadel Investment Group.
Bucyrus International (Nasdaq: BUCY - News) is a construction firm that has benefited from the mining boom by providing the necessary machinery. About 73% of the company's annual revenue comes from coal mining customers, a sector that has outperformed in 2008 as rising oil prices have led to a bigger focus on coal energy. Legendary hedge fund Soros Fund Management had a large position in Bucyrus at the end of Q1. Soros' largest holding at the end of Q1 was in Brazilian miner Vale (NYSE: RIO - News). A list of Soros' top-15, U.S.-listed, equity holdings is available at tickerspy.com.
Arena Resources (NYSE: ARD - News) is an oil and gas company that has gained on rising energy demand and prices. Arena has been acquiring and developing drilling property in New Mexico and Texas, and analysts believe the company has positioned itself to benefit from global oil market fundamentals. Arena has a number of backers. Eight Pro investors counted the company as one of their top-15, U.S.-listed, equity holdings at the end of Q1, and tickerspy members who track the stock in their portfolios tend to track other energy plays like Southwestern Energy (NYSE: SWN - News).
Sociedad Quimica y Minera (NYSE: SQM - News) is a large-cap chemical company based in Chile that has been able to double its stock price in the past year by riding the global commodities boom. Specifically, the company has benefited from rising demand for fertilizer and lithium, a key component of batteries in hybrid vehicles. While only one Pro investor included SQM among its top-15, U.S.-listed, equity holdings at the end of Q1, a large number of tickerspy members are tracking it in their portfolios. Of those, many are also tracking other large agriculture plays such as Potash (NYSE: POT - News), Mosaic (NYSE: MOS - News), and Agrium (NYSE: AGU - News).
CF Industries (NYSE: CF - News) is another large agricultural play that has shown remarkable growth despite yesterday's sharp pullback. The stock price has more than doubled in the last year as growing food demands in emerging markets combined with government mandates on crop-based biofuels to create a surge in demand for fertilizers. 18 Professional investors counted CF among their top-15, U.S.-listed, equity holdings at the end of Q1, including hedge fund giant Citadel Investment Group.
Bucyrus International (Nasdaq: BUCY - News) is a construction firm that has benefited from the mining boom by providing the necessary machinery. About 73% of the company's annual revenue comes from coal mining customers, a sector that has outperformed in 2008 as rising oil prices have led to a bigger focus on coal energy. Legendary hedge fund Soros Fund Management had a large position in Bucyrus at the end of Q1. Soros' largest holding at the end of Q1 was in Brazilian miner Vale (NYSE: RIO - News). A list of Soros' top-15, U.S.-listed, equity holdings is available at tickerspy.com.
Arena Resources (NYSE: ARD - News) is an oil and gas company that has gained on rising energy demand and prices. Arena has been acquiring and developing drilling property in New Mexico and Texas, and analysts believe the company has positioned itself to benefit from global oil market fundamentals. Arena has a number of backers. Eight Pro investors counted the company as one of their top-15, U.S.-listed, equity holdings at the end of Q1, and tickerspy members who track the stock in their portfolios tend to track other energy plays like Southwestern Energy (NYSE: SWN - News).
In a Slow IPO Market, SandRidge and Intrepid Potash Stand Out
In the past year, the worsening credit situation and downturn in the overall economy have had a negative effect on the frequency and performance of IPOs. Nonetheless, there have been a few exceptions as companies like fertilizer manufacturer Intrepid Potash (NYSE: IPI - News) and oil and gas producer SandRidge Energy (NYSE: SD - News) have posted impressive numbers.
Fertilizer maker Intrepid Potash was a highly anticipated IPO that has surged about 75% from its offer price in the three months since debuting. The success that the stock has enjoyed can be attributed to the booming agriculture sector, which has also been a boon to companies like Monsanto (NYSE: MON - News) and Mosaic (NYSE: MOS - News). Intrepid has been quite popular in the tickerspy community. Members who track Intrepid Potash are also likely to track Potash (NYSE: POT - News), another high-flying fertilizer firm.
SandRidge Energy also debuted recently and is also enjoying enormous success in this tough market. The share price is up nearly 90% from its November IPO. The company is involved in a broad range of energy services, including exploration, development and production of natural gas and oil. 13 Pro investors reported the stock as one of their top-15, U.S-listed, equity holdings at the end of Q1, including highly regarded hedge funds Lone Pine Capital, Farallon Capital Management, and Touradji Capital Management. The tickerspy members tracking the company are also likely to be tracking other big name energy firms such as Chesapeake Energy (NYSE: CHK - News), XTO Energy (NYSE: XTO - News), and Petrobras (NYSE: PBR - News, PBR-A - News).
Generally speaking, however, SandRidge and Intrepid have been exceptions to the IPO trend, as quite a few recent IPOs have faltered in their first months of trading. Among these is Chinese online gaming firm Giant Interactive (NYSE: GA - News), which has dropped by about -30% from its offering price as a general malaise surrounding Chinese stocks has set in over the last several months. Nonetheless, quite a few tickerspy members are tracking the stock. These members are likely to be active in other Chinese names, including Baidu.com (Nasdaq: BIDU - News) and Ctrip.com (Nasdaq: CTRP - News).
Fertilizer maker Intrepid Potash was a highly anticipated IPO that has surged about 75% from its offer price in the three months since debuting. The success that the stock has enjoyed can be attributed to the booming agriculture sector, which has also been a boon to companies like Monsanto (NYSE: MON - News) and Mosaic (NYSE: MOS - News). Intrepid has been quite popular in the tickerspy community. Members who track Intrepid Potash are also likely to track Potash (NYSE: POT - News), another high-flying fertilizer firm.
SandRidge Energy also debuted recently and is also enjoying enormous success in this tough market. The share price is up nearly 90% from its November IPO. The company is involved in a broad range of energy services, including exploration, development and production of natural gas and oil. 13 Pro investors reported the stock as one of their top-15, U.S-listed, equity holdings at the end of Q1, including highly regarded hedge funds Lone Pine Capital, Farallon Capital Management, and Touradji Capital Management. The tickerspy members tracking the company are also likely to be tracking other big name energy firms such as Chesapeake Energy (NYSE: CHK - News), XTO Energy (NYSE: XTO - News), and Petrobras (NYSE: PBR - News, PBR-A - News).
Generally speaking, however, SandRidge and Intrepid have been exceptions to the IPO trend, as quite a few recent IPOs have faltered in their first months of trading. Among these is Chinese online gaming firm Giant Interactive (NYSE: GA - News), which has dropped by about -30% from its offering price as a general malaise surrounding Chinese stocks has set in over the last several months. Nonetheless, quite a few tickerspy members are tracking the stock. These members are likely to be active in other Chinese names, including Baidu.com (Nasdaq: BIDU - News) and Ctrip.com (Nasdaq: CTRP - News).
Wednesday, July 23, 2008
CNH Global tightens outlook citing strong market
CNL raises lower end of 2008 profit guidance range citing strong farm equipment demand
BURR RIDGE, Ill. (AP) -- CNH Global NV, a Netherlands-based heavy equipment company, on Wednesday raised the lower end its fiscal year profit outlook range citing positive expectations for farm equipment demand.
CNH said it now expects to post a 2008 profit of $3.40 per share to $3.60 per share, compared with its previous prediction of $3.30 per share to $3.60 per share. The estimate excludes restructuring charges.
Analysts polled by Thomson Financial expect profit of $3.37 per share, excluding restructuring charges, for the year.
Revenue is expected to be up about 25 percent from 2007. Based on the company's 2007 revenue of $4.33 billion, the guidance projects 2008 revenue of $5.41 billion.
CNH said the outlook for the global agricultural industry remains excellent, with high commodity prices and low commodity stocks fueling continued growth in global demand for higher horsepower tractors and combines.
BURR RIDGE, Ill. (AP) -- CNH Global NV, a Netherlands-based heavy equipment company, on Wednesday raised the lower end its fiscal year profit outlook range citing positive expectations for farm equipment demand.
CNH said it now expects to post a 2008 profit of $3.40 per share to $3.60 per share, compared with its previous prediction of $3.30 per share to $3.60 per share. The estimate excludes restructuring charges.
Analysts polled by Thomson Financial expect profit of $3.37 per share, excluding restructuring charges, for the year.
Revenue is expected to be up about 25 percent from 2007. Based on the company's 2007 revenue of $4.33 billion, the guidance projects 2008 revenue of $5.41 billion.
CNH said the outlook for the global agricultural industry remains excellent, with high commodity prices and low commodity stocks fueling continued growth in global demand for higher horsepower tractors and combines.
Agri-Market Boost for DuPont
Growth for DuPont (NYSE: DD - News)will be driven by non-G7 markets, agricultural chemicals and a focus on key customers and new products. 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 agriculture and other markets outside the U.S. This compels us to rate the stock a Hold with a target of $45.00.
The company has a strategy in place to increase volume growth. DuPont has an Ag Platform that is among the industry leaders. It intends to capitalize on rising global demand for its science-based products in agriculture as well as safety and protection. It plans to extend its productivity improvement programs and expects to generate $1.7 billion in productivity gains over the next three years by continuing its efforts to streamline and simplify its supply chains and business support operations.
DuPont expects to achieve at least 30% North American seed corn market share in 2008 and to grow this share in future years. The Pioneer Hi-Bred business is expanding in other regions as well. Pioneer will increase its seed production acreage by 58% in 2008 to meet increased demand for its canola hybrids.
DuPont is optimistic about the Asian economy, especially China. Currently, the company has 38 entities in China including 19 wholly owned enterprises. For the last five years, the company's average annual growth rate is 17% in the country. The company invested more than $700 million in China, which is expected to reach $1.2 billion in 2010.
The company is focusing on nearly doubling its earnings growth rate. However, slowing demand in U.S. markets is likely to offset growth in agriculture and other markets outside the U.S. This compels us to rate the stock a Hold with a target of $45.00.
The company has a strategy in place to increase volume growth. DuPont has an Ag Platform that is among the industry leaders. It intends to capitalize on rising global demand for its science-based products in agriculture as well as safety and protection. It plans to extend its productivity improvement programs and expects to generate $1.7 billion in productivity gains over the next three years by continuing its efforts to streamline and simplify its supply chains and business support operations.
DuPont expects to achieve at least 30% North American seed corn market share in 2008 and to grow this share in future years. The Pioneer Hi-Bred business is expanding in other regions as well. Pioneer will increase its seed production acreage by 58% in 2008 to meet increased demand for its canola hybrids.
DuPont is optimistic about the Asian economy, especially China. Currently, the company has 38 entities in China including 19 wholly owned enterprises. For the last five years, the company's average annual growth rate is 17% in the country. The company invested more than $700 million in China, which is expected to reach $1.2 billion in 2010.
Tuesday, July 22, 2008
The 2008 Share Repurchase Program At Potash Corp. (Part VI)
On January 23rd, 2008, a little noticed news item was released by Potash Corp. (POT). That particular day was also the day when the stock price reached its lowest point of the year, about 120, which was about 7 dollars under the 50 day moving average. Once again, for the sake of argument, this was also the day when the historic hand off to Potash occurred, as well as the day that marked the end of the negative influence of that unlucky albatross (see Part V). So this was, all in all, a rather meaningful day for the long term investors in Potash Corp.
The news item was an announcement of a share repurchase program, involving up to 15,82 million shares, or about 5% of the outstanding 315.4 million shares. At the very low price of 120 per share, that equals $1.8984 billion! If considered advisable, these shares are to be repurchased on the open market through January 30th, 2009, at prevailing market prices. The timing and amount of purchases if any, will be dependent upon the availability and alternative uses of capital, market conditions and other factors.
How interesting that management would choose such a propitious day for the kick off of their share repurchase program. Low price day, kick off day, hand off day, and farewell to albatross day, are all taking place on the same day, and no one really seemed to notice. The choice of this day means that management could then start to repurchase shares at the lowest available price of the year, $120 per share.
I wonder if the markets have the positive effects of the savvy of this management team priced in correctly? I also wonder if the markets truly understand what share repurchase programs are all about, and how they influence all the numbers relating to efficient use of what is, after all, the shareholder's capital. I would also like to mention that on that same day, management also declared a "measly" dividend of only 10 cents per share. For some investors, that's a clear sell signal, as obviously management doesn't know what to do with its profits, or how to best reward its long term shareholders. Or does it?
Another news item was released by Potash Corp on April 24th, 2008, concerning its fourth quarter results. Included within this bewildering collection of numbers, were the fourth quarter results for the share repurchase program. These revealed that management had repurchased 3,398,800 shares at a cost of 516.3 million, or 151.9 dollars per share. This means that 21.48% of the total amount of shares available in their program were bought, which also represent about 1.08% of the total amount of tradeable shares.
It seems to me that management succeeded in buying back 1.08% of the total shares from the panic stricken Potash bears, at a price equaling 46.64% of Monday's closing price of 222.75. This means that those shares which management bought for 516.3 million, would now be worth 757 million, if still in circulation, which is a difference of 240.7 million. So who benefits?
So what did management do with all the repurchased shares? Answer: It destroyed them all. Now why would management destroy the value of $757 million worth of company shares that only cost it $516.3 million on the open market in the first place?
Answer: To make the remaining shares more valuble! The laws of supply and demand are working quite well at Potash Corp, I can assure you. Many of the remaining shares are in the hands of the company's cherished long term investors, for whom the share repurchase program is intended to benefit the most. Does anyone understand this?
Warren Buffet sure does. He said, "When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the market place, no alternative action can benefit shareholders as surely as repurchases" Peter Lynch calls share repurchases "The simplest and best way a company can reward its investors." Joshua Kennon at beginnersinvest.about.com calls them "The golden egg of shareholder value." I even like them.
Apparently the people shorting this stock, and the ones trying to time the market by all their excessive buying and selling activities, don't seem to realize that they are up against management's share repurchase program. It looks like management is buying when the fear and ignorance is greatest, usually represented by the stock trading below its 50 day moving average. This is the patient long term investor's best insurance policy. We are happy when the stock price goes up of course, but we are also happy when the stock price goes way down. Then the share repurchase program kicks in and eventually makes are shares worth more. So we are happy no matter what happens.
If the patient long term investors got a 201% return in 2007, plus a 54.73% year to date return to Monday, July 21st, then I wonder how the other players have done. If they can top the returns of us lazy and ignorant long term investors, then they have done very well indeed. But have they?..seeking alpha
The news item was an announcement of a share repurchase program, involving up to 15,82 million shares, or about 5% of the outstanding 315.4 million shares. At the very low price of 120 per share, that equals $1.8984 billion! If considered advisable, these shares are to be repurchased on the open market through January 30th, 2009, at prevailing market prices. The timing and amount of purchases if any, will be dependent upon the availability and alternative uses of capital, market conditions and other factors.
How interesting that management would choose such a propitious day for the kick off of their share repurchase program. Low price day, kick off day, hand off day, and farewell to albatross day, are all taking place on the same day, and no one really seemed to notice. The choice of this day means that management could then start to repurchase shares at the lowest available price of the year, $120 per share.
I wonder if the markets have the positive effects of the savvy of this management team priced in correctly? I also wonder if the markets truly understand what share repurchase programs are all about, and how they influence all the numbers relating to efficient use of what is, after all, the shareholder's capital. I would also like to mention that on that same day, management also declared a "measly" dividend of only 10 cents per share. For some investors, that's a clear sell signal, as obviously management doesn't know what to do with its profits, or how to best reward its long term shareholders. Or does it?
Another news item was released by Potash Corp on April 24th, 2008, concerning its fourth quarter results. Included within this bewildering collection of numbers, were the fourth quarter results for the share repurchase program. These revealed that management had repurchased 3,398,800 shares at a cost of 516.3 million, or 151.9 dollars per share. This means that 21.48% of the total amount of shares available in their program were bought, which also represent about 1.08% of the total amount of tradeable shares.
It seems to me that management succeeded in buying back 1.08% of the total shares from the panic stricken Potash bears, at a price equaling 46.64% of Monday's closing price of 222.75. This means that those shares which management bought for 516.3 million, would now be worth 757 million, if still in circulation, which is a difference of 240.7 million. So who benefits?
So what did management do with all the repurchased shares? Answer: It destroyed them all. Now why would management destroy the value of $757 million worth of company shares that only cost it $516.3 million on the open market in the first place?
Answer: To make the remaining shares more valuble! The laws of supply and demand are working quite well at Potash Corp, I can assure you. Many of the remaining shares are in the hands of the company's cherished long term investors, for whom the share repurchase program is intended to benefit the most. Does anyone understand this?
Warren Buffet sure does. He said, "When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the market place, no alternative action can benefit shareholders as surely as repurchases" Peter Lynch calls share repurchases "The simplest and best way a company can reward its investors." Joshua Kennon at beginnersinvest.about.com calls them "The golden egg of shareholder value." I even like them.
Apparently the people shorting this stock, and the ones trying to time the market by all their excessive buying and selling activities, don't seem to realize that they are up against management's share repurchase program. It looks like management is buying when the fear and ignorance is greatest, usually represented by the stock trading below its 50 day moving average. This is the patient long term investor's best insurance policy. We are happy when the stock price goes up of course, but we are also happy when the stock price goes way down. Then the share repurchase program kicks in and eventually makes are shares worth more. So we are happy no matter what happens.
If the patient long term investors got a 201% return in 2007, plus a 54.73% year to date return to Monday, July 21st, then I wonder how the other players have done. If they can top the returns of us lazy and ignorant long term investors, then they have done very well indeed. But have they?..seeking alpha
Friday, July 18, 2008
Agrium Growing in Many Ways
Agrium Inc. (NYSE: AGU - News) is growing through acquisition and organic expansion of existing operations. The proposed United Agri-Products (UAP) acquisition is likely to drive revenues and profits on the back of an expanded product line in the major business segment.
Margins should be elevated for at least 2-3 years as supply/demand is expected to remain good for phosphates, nitrogen and potash through 2011. The company is highly leveraged to increasing product prices. Strong global prices for these products are likely to benefit all its business units of the company. Agrium also has significant free cash flow. As a result, we rate the shares a Buy with a target of $118.00.
From the UAP acquisition, the company expects 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, which is expected to increase the company's purchase-for-resale business by close to 2.5 million tons on annually.
Agrium plans to expand its retail operations in South America through organic growth and greenfield expansion. The company will target large farmers, who want a one-stop shop for fertilizer, chemicals, seeds as well as application services for the inputs. The company also restarted its smaller Redwater #1 ammonia plant late in the first quarter..zacks.com
Margins should be elevated for at least 2-3 years as supply/demand is expected to remain good for phosphates, nitrogen and potash through 2011. The company is highly leveraged to increasing product prices. Strong global prices for these products are likely to benefit all its business units of the company. Agrium also has significant free cash flow. As a result, we rate the shares a Buy with a target of $118.00.
From the UAP acquisition, the company expects 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, which is expected to increase the company's purchase-for-resale business by close to 2.5 million tons on annually.
Agrium plans to expand its retail operations in South America through organic growth and greenfield expansion. The company will target large farmers, who want a one-stop shop for fertilizer, chemicals, seeds as well as application services for the inputs. The company also restarted its smaller Redwater #1 ammonia plant late in the first quarter..zacks.com
Thursday, July 17, 2008
Fertile Ground for Gains
With the world's biggest fertilizer firm reporting earnings, I figured it's a good time to check in on the sector.
No, Potash Corp of Saskatchewan (NYSE: POT) hasn't reported yet. I'm talking about the biggest company by sales, not market capitalization.
Yara International is the Nokia (NYSE: NOK) of nitrogen. The Norwegian powerhouse commands around 7% global fertilizer market share. Like Agrium (NYSE: AGU) and CF Industries (NYSE: CF), Yara is enjoying tremendous demand for its nitrogen products. Costs -- 70%-90% owing to natural gas, depending on the product -- are rising, but high demand from the world's agricultural end-users has lifted fertilizer prices at an even faster clip.
As with fertility goddess PCS, Yara sources low-cost gas in Trinidad, and the company has also secured supply in the Middle East. This is important, because European natural gas prices have gone through the roof. I'm less familiar with other nitrogen producers' natural gas supply chains, but Fools ought to be laser-focused on this absolutely critical component.
The commodity nature of nitrogen may help explain Mosaic's (NYSE: MOS) decision to pass off its Saskferco stake to Yara this week. Mosaic is tops in phosphate, and is also pursuing more potash prowess. The company's nitrogen operations were decidedly non-core, and are a better fit for the highly integrated Yara.
Speaking of potash expansions, PCS just announced it's increasing capacity by 2.7 million metric tons. The gains are all coming from either de-bottlenecking or expanding current projects, and at a cost 60% below building a brand new mine. Production will come online faster, too. Such are the perks of excess capacity.
There are a few other global developments worth mentioning. On May 1, China raised its export duties on urea from 35% to 135%. This mirrors the country's recent curbs on the production of aluminum -- another energy-intensive product. That tariff lifted urea prices 50%, and they're moving even higher of late, at least partially on news of various delays to Middle Eastern projects.
Rounding out the week's events was Canpotex's (the Canadian potash alliance) roughly 20% price hike from current levels, to $1,000 per metric ton. The same day, Belarusian Potash, Canpotex's Eastern European analogue, kicked its latest Sri Lankan contract up to $1,050. You thought iron ore ogres Vale (NYSE: RIO) and Rio Tinto (NYSE: RTP) were having all the fun? These potash combines are wielding simply tremendous market power today.
No, Potash Corp of Saskatchewan (NYSE: POT) hasn't reported yet. I'm talking about the biggest company by sales, not market capitalization.
Yara International is the Nokia (NYSE: NOK) of nitrogen. The Norwegian powerhouse commands around 7% global fertilizer market share. Like Agrium (NYSE: AGU) and CF Industries (NYSE: CF), Yara is enjoying tremendous demand for its nitrogen products. Costs -- 70%-90% owing to natural gas, depending on the product -- are rising, but high demand from the world's agricultural end-users has lifted fertilizer prices at an even faster clip.
As with fertility goddess PCS, Yara sources low-cost gas in Trinidad, and the company has also secured supply in the Middle East. This is important, because European natural gas prices have gone through the roof. I'm less familiar with other nitrogen producers' natural gas supply chains, but Fools ought to be laser-focused on this absolutely critical component.
The commodity nature of nitrogen may help explain Mosaic's (NYSE: MOS) decision to pass off its Saskferco stake to Yara this week. Mosaic is tops in phosphate, and is also pursuing more potash prowess. The company's nitrogen operations were decidedly non-core, and are a better fit for the highly integrated Yara.
Speaking of potash expansions, PCS just announced it's increasing capacity by 2.7 million metric tons. The gains are all coming from either de-bottlenecking or expanding current projects, and at a cost 60% below building a brand new mine. Production will come online faster, too. Such are the perks of excess capacity.
There are a few other global developments worth mentioning. On May 1, China raised its export duties on urea from 35% to 135%. This mirrors the country's recent curbs on the production of aluminum -- another energy-intensive product. That tariff lifted urea prices 50%, and they're moving even higher of late, at least partially on news of various delays to Middle Eastern projects.
Rounding out the week's events was Canpotex's (the Canadian potash alliance) roughly 20% price hike from current levels, to $1,000 per metric ton. The same day, Belarusian Potash, Canpotex's Eastern European analogue, kicked its latest Sri Lankan contract up to $1,050. You thought iron ore ogres Vale (NYSE: RIO) and Rio Tinto (NYSE: RTP) were having all the fun? These potash combines are wielding simply tremendous market power today.
Mosaic initiates quarterly dividend of $0.05
Co announced that its Board of Directors declared a quarterly dividend of $0.05 per share on the co's common stock. The dividend will be paid on August 21, 2008 to stockholders of record as of the close of business on August 7, 2008.
Potash Heats Up: $1000 a Tonne?
Another very busy day....
Lost in yesterday's excitement was news that Canpotex [remember - that is an alliance of Potash (POT), Mosaic (MOS), and Agrium (AGU)] has raised spot prices for some Asian buyers to $1000/tonne. The Russians have joined as well.
Notice a trend I hope?
[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]
Canpotex, the export marketing consortium for Canadian potash miners, has raised its spot price for some Asian buyers to $1,000 per tonne, an analyst at J.P. Morgan said on Wednesday.
The new price is up 21 percent from current delivered values, and will take effect in the fourth quarter, David Silver wrote in a note to clients, quoting fertilizer industry consultant FMB Group Ltd.
"We believe the rapid rise in offshore potash prices will put increase pressure on importers in India and China ahead of their upcoming negotiations for new supply contracts later this year," Silver wrote.
Earlier on Wednesday, Belarussian Potash Company (BPC) said it sold 40,000 tonnes of potash to Sri Lanka at a record price of $1,050 per tonne. The BPC consortium exports the mineral for Russian miner Uralkali and Belaruskali, and had earlier hiked its spot prices to $1,000 per tonne, effective July.
As of June, spot prices for potash exported from Canada had climbed about 200 percent from a year earlier, according to data from Potash Corp, the world's largest fertilizer company.
Potash Corp said last week it would increase its U.S. prices by $250 per short tonne, which J.P. Morgan's Silver estimated would make the price $772 per short tonne, an increase of 48 percent.
China, the world's largest potash importer, is paying about $660 per tonne (delivered) under a contract that expires later this year -- about triple its 2007 price -- and India, another major buyer, is paying $625 per tonne.
Silver said he expected higher prices would boost earnings per share by $1.90 for Potash Corp, 90 cents to $1 for Mosaic, and 60 cents for Agrium.
For the few long time readers who were around last October - remember that
nasty sinkhole in Russia? Well, it's back at its old tricks again.
An emergency rail link allowing Russian potash miner Silvinit [SILV.RTS] to deliver the in-demand soil nutrient is likely to close in the next few weeks under threat from an expanding sinkhole, a senior engineer said on Monday.
Sergei Testov, chief engineer at a power station near the sinkhole, said the link could be disrupted for at least several weeks as the government considers options for a third rail spur to move potash from Silvinit's mine in the Ural mountains.
"We will do everything we can to build the new rail line before the old one is closed," Testov, one of the lead engineers in the rail link construction program, told Reuters by telephone from Perm region. "It probably won't be a disruption of two or three months, but for two or three weeks we will probably need to disrupt it."
Silvinit, which accounts for over 10 percent of global potash supply, reduced shipments of the soil nutrient last year after the collapse of a 50-year-old deposit owned by rival miner Uralkali opened up the sinkhole and cut its rail link.
Canada's Potash Corp of Saskatchewan (POT), the world's largest potash miner, suspended new sales contracts temporarily in October on fears of a global shortage following the first disruption near the sinkhole.
"The situation is keeping us in suspense, but we are sure a crisis can be averted," said Anton Subbotin, chief spokesman for Silvinit.
The plant is only a few hundred metres from the sinkhole, a crater 300 metres in diameter and 70 metres deep. Both Testov and Subbotin said the hole was about 100 metres from the replacement rail link completed this year, and that it was spreading toward it. When it gets to within 75 metres, local safety officials would shut it down, they said.
"The alternative is still only in the planning stages," the engineer said. "Once the government makes a decision, in the best case scenario I think we can build it in three months."
At a tour of the power plant last week, Testov and plant director Alexei Maltsov said the sinkhole was expanding toward the rail line at about 10 metres per week -- meaning only two or three weeks remain before the line would need to be closed. But on Monday, Testov revised this estimate, saying the expansion of the sinkhole had slowed. He declined to give a more specific estimate.
Takeaways:
It is unbelievable how so many people want to call the end of the commodities "bubble" - if oil falls or as the media says "plunges" over 2 days, they want to call the whole thing off. This literally has happened 4 times since last summer and each time it lasted 5-15 days, and in that time everyone says "gotcha" and then a month later the commodity stocks are screaming higher. Meanwhile the retail investor who listens to the pundits has panicked into the selloff. Shameful.
Even if oil goes to $105, I am unclear how fertilizer = oil... but since I'm a simple person perhaps the supercomputers at the hedge funds could better explain it to me. I know, I know crude = wheat = nickel = corn = potash = iron = coal = sugar. It's all the same thing! It's all just "one big trade" so sell 'em off! Yep.
In an ever increasing inflationary environment where inputs are causing pricing pressure we continue to seek the few sectors where the price increases passed from producers to their customers is at least keeping up with the cost pressures of their inputs. Fertilizer has remained one of those groups..seeking alpha
Lost in yesterday's excitement was news that Canpotex [remember - that is an alliance of Potash (POT), Mosaic (MOS), and Agrium (AGU)] has raised spot prices for some Asian buyers to $1000/tonne. The Russians have joined as well.
Notice a trend I hope?
[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]
Canpotex, the export marketing consortium for Canadian potash miners, has raised its spot price for some Asian buyers to $1,000 per tonne, an analyst at J.P. Morgan said on Wednesday.
The new price is up 21 percent from current delivered values, and will take effect in the fourth quarter, David Silver wrote in a note to clients, quoting fertilizer industry consultant FMB Group Ltd.
"We believe the rapid rise in offshore potash prices will put increase pressure on importers in India and China ahead of their upcoming negotiations for new supply contracts later this year," Silver wrote.
Earlier on Wednesday, Belarussian Potash Company (BPC) said it sold 40,000 tonnes of potash to Sri Lanka at a record price of $1,050 per tonne. The BPC consortium exports the mineral for Russian miner Uralkali and Belaruskali, and had earlier hiked its spot prices to $1,000 per tonne, effective July.
As of June, spot prices for potash exported from Canada had climbed about 200 percent from a year earlier, according to data from Potash Corp, the world's largest fertilizer company.
Potash Corp said last week it would increase its U.S. prices by $250 per short tonne, which J.P. Morgan's Silver estimated would make the price $772 per short tonne, an increase of 48 percent.
China, the world's largest potash importer, is paying about $660 per tonne (delivered) under a contract that expires later this year -- about triple its 2007 price -- and India, another major buyer, is paying $625 per tonne.
Silver said he expected higher prices would boost earnings per share by $1.90 for Potash Corp, 90 cents to $1 for Mosaic, and 60 cents for Agrium.
For the few long time readers who were around last October - remember that
nasty sinkhole in Russia? Well, it's back at its old tricks again.
An emergency rail link allowing Russian potash miner Silvinit [SILV.RTS] to deliver the in-demand soil nutrient is likely to close in the next few weeks under threat from an expanding sinkhole, a senior engineer said on Monday.
Sergei Testov, chief engineer at a power station near the sinkhole, said the link could be disrupted for at least several weeks as the government considers options for a third rail spur to move potash from Silvinit's mine in the Ural mountains.
"We will do everything we can to build the new rail line before the old one is closed," Testov, one of the lead engineers in the rail link construction program, told Reuters by telephone from Perm region. "It probably won't be a disruption of two or three months, but for two or three weeks we will probably need to disrupt it."
Silvinit, which accounts for over 10 percent of global potash supply, reduced shipments of the soil nutrient last year after the collapse of a 50-year-old deposit owned by rival miner Uralkali opened up the sinkhole and cut its rail link.
Canada's Potash Corp of Saskatchewan (POT), the world's largest potash miner, suspended new sales contracts temporarily in October on fears of a global shortage following the first disruption near the sinkhole.
"The situation is keeping us in suspense, but we are sure a crisis can be averted," said Anton Subbotin, chief spokesman for Silvinit.
The plant is only a few hundred metres from the sinkhole, a crater 300 metres in diameter and 70 metres deep. Both Testov and Subbotin said the hole was about 100 metres from the replacement rail link completed this year, and that it was spreading toward it. When it gets to within 75 metres, local safety officials would shut it down, they said.
"The alternative is still only in the planning stages," the engineer said. "Once the government makes a decision, in the best case scenario I think we can build it in three months."
At a tour of the power plant last week, Testov and plant director Alexei Maltsov said the sinkhole was expanding toward the rail line at about 10 metres per week -- meaning only two or three weeks remain before the line would need to be closed. But on Monday, Testov revised this estimate, saying the expansion of the sinkhole had slowed. He declined to give a more specific estimate.
Takeaways:
It is unbelievable how so many people want to call the end of the commodities "bubble" - if oil falls or as the media says "plunges" over 2 days, they want to call the whole thing off. This literally has happened 4 times since last summer and each time it lasted 5-15 days, and in that time everyone says "gotcha" and then a month later the commodity stocks are screaming higher. Meanwhile the retail investor who listens to the pundits has panicked into the selloff. Shameful.
Even if oil goes to $105, I am unclear how fertilizer = oil... but since I'm a simple person perhaps the supercomputers at the hedge funds could better explain it to me. I know, I know crude = wheat = nickel = corn = potash = iron = coal = sugar. It's all the same thing! It's all just "one big trade" so sell 'em off! Yep.
In an ever increasing inflationary environment where inputs are causing pricing pressure we continue to seek the few sectors where the price increases passed from producers to their customers is at least keeping up with the cost pressures of their inputs. Fertilizer has remained one of those groups..seeking alpha
The 2008 Historic Potash Handoff (Part V)
The next step in this ongoing series of articles on Potash Corp (POT) is to look at the 2008 first quarter results for the total gross margin. For the period, the total gross margin was 856.0 million, which was a 131.5% increase over the the 2007 first quarter gross margin, and a 60% increase over the 2007 fourth quarter gross margin. Of this amount, an impressive 514.6 or 60% came from Potash, while 185.4 or 22% came from Nitrogen, and 156.0 or 18% came from Phosphate. So, the combined total contribution of Nitogen and Phosphate, 341.4 or 40%, could not measure up to the 514.6 or 60% contribution of Potash. Here can you see, that something important has already happened in the first quarter of 2008. Potash has suddenly made a big comeback, compared to its 2007 performance. This is what I believe will be called the historic hand-off to Potash, that marks the point when Potash first started to run with the ball. It is from this point, and not some point in 2007 or before, when Potash starts to completely dominate the other two segments, and thereby the whole game plan of this company, as management has indicated all along.
FOR THE SAKE OF ARGUMENT ONLY, I would like to take the liberty to pinpoint this hand-off event as occurring on January 23rd, 2008 at the stock price of 120, and the 50 day moving average at 127. The purpose of this exercise is to establish an easy-to-relate-to group of numbers that represent the bottom of the January 2008 panic and subsequent sell-off. The stock price was then only 94.5% of the 50 day moving average, or for those of you who like to measure things from the other side, the stock price needed to increase by 5.8% in order to equal its 50 day moving average.
Another reason for the pinpointing of this date and stock price is to capture that moment that was the darkest moment before dawn - also known as an excellent buying opportunity for wise and seasoned investors. It is on this day, and not some other day in 2007, that Potash begins its long overdue journey of redemption, by finally getting the hand-off and running with the ball.
Taking the stock price of 120, on January 23rd, 2008, and comparing it to 228.51, or the closing price on Monday, July 14th, 2008, reveals that the stock price has increased by about 90% in slightly less than the six months since the historic hand-off. Is this stock still undervalued? Keith Carpenter at Canaccord Adams seems to think so. In a July 10th article, "Canaccord Adams Bullish On Fertilizer Companies", he gave us an "outrageous" price target of 425. Judging by the paucity of colorful blog replies, apparently the Potash Bears were in summer hibernation that day, or else they accepted his reasoning. He arrived at this number by applying a multiple of 17 times to his earnings per share target for 2009 of 25,21 (canadian dollars) His number is very similar to a number I get by the very unprofessional and generally unacceptable means of multiplying the 2007 year end closing price of 143.96 by 201% to equal 433.3. This number however is neither a prediction nor a promise, as it is merely a means to compare the stock prices of 2007 to 2008 as it unfolds.
By this measurement the stock has only increased by 58.73% year to date Monday, July 14th. Therefore, it should be more than double, (288) by now, or it's not keeping pace with the "lousy" 201% gain in 2007. As management has indicated that 2008 will surpass 2007, and that 2009 looks set to surpass 2008, Mr. Carpenter's number seems quite conservative to me. Management is, of course, talking about the company, not the stock price. They have however, on other occasions expressed their disappointment in the apparent inability of the stock to consistently trade at a much higher multiple than its peers in the fertilzer business.
I don't usually speculate about specific stock prices by specific dates. It is only the remarkable closeness of the two numbers that inspires me to do so at this time. Besides, in the interests of fair play, this provides the sleepy summer Potash Bears with a unique opportunity of pelting two Potash Bulls with one clump of sun-dried ammunition, of their own making.
For me, the company is one thing and the stock price is another, and I don't believe in considering the two as one. Further more I focus on the company, as the stock price at any moment only represents the mechanism that brings the supply and demand of the stock into a relative balance, for that one moment in time only. The financial health of the company, on the other hand, is the result of a whole different set of price mechanisms that govern all its operations.. from seeking alpha
FOR THE SAKE OF ARGUMENT ONLY, I would like to take the liberty to pinpoint this hand-off event as occurring on January 23rd, 2008 at the stock price of 120, and the 50 day moving average at 127. The purpose of this exercise is to establish an easy-to-relate-to group of numbers that represent the bottom of the January 2008 panic and subsequent sell-off. The stock price was then only 94.5% of the 50 day moving average, or for those of you who like to measure things from the other side, the stock price needed to increase by 5.8% in order to equal its 50 day moving average.
Another reason for the pinpointing of this date and stock price is to capture that moment that was the darkest moment before dawn - also known as an excellent buying opportunity for wise and seasoned investors. It is on this day, and not some other day in 2007, that Potash begins its long overdue journey of redemption, by finally getting the hand-off and running with the ball.
Taking the stock price of 120, on January 23rd, 2008, and comparing it to 228.51, or the closing price on Monday, July 14th, 2008, reveals that the stock price has increased by about 90% in slightly less than the six months since the historic hand-off. Is this stock still undervalued? Keith Carpenter at Canaccord Adams seems to think so. In a July 10th article, "Canaccord Adams Bullish On Fertilizer Companies", he gave us an "outrageous" price target of 425. Judging by the paucity of colorful blog replies, apparently the Potash Bears were in summer hibernation that day, or else they accepted his reasoning. He arrived at this number by applying a multiple of 17 times to his earnings per share target for 2009 of 25,21 (canadian dollars) His number is very similar to a number I get by the very unprofessional and generally unacceptable means of multiplying the 2007 year end closing price of 143.96 by 201% to equal 433.3. This number however is neither a prediction nor a promise, as it is merely a means to compare the stock prices of 2007 to 2008 as it unfolds.
By this measurement the stock has only increased by 58.73% year to date Monday, July 14th. Therefore, it should be more than double, (288) by now, or it's not keeping pace with the "lousy" 201% gain in 2007. As management has indicated that 2008 will surpass 2007, and that 2009 looks set to surpass 2008, Mr. Carpenter's number seems quite conservative to me. Management is, of course, talking about the company, not the stock price. They have however, on other occasions expressed their disappointment in the apparent inability of the stock to consistently trade at a much higher multiple than its peers in the fertilzer business.
I don't usually speculate about specific stock prices by specific dates. It is only the remarkable closeness of the two numbers that inspires me to do so at this time. Besides, in the interests of fair play, this provides the sleepy summer Potash Bears with a unique opportunity of pelting two Potash Bulls with one clump of sun-dried ammunition, of their own making.
For me, the company is one thing and the stock price is another, and I don't believe in considering the two as one. Further more I focus on the company, as the stock price at any moment only represents the mechanism that brings the supply and demand of the stock into a relative balance, for that one moment in time only. The financial health of the company, on the other hand, is the result of a whole different set of price mechanisms that govern all its operations.. from seeking alpha
Wednesday, July 16, 2008
Agribusiness Still Has Upside
Who said grains were better than gold? Oh, that's right. WE did ("Agribusiness Outshines Gold").
Well, truth be told, we actually compared agribusiness - chemical and equipment production related to raising grain, together with other agriculture ventures in livestock and oilseeds - to the yellow metal.
Back in November, agribusiness stocks were leaving gold in the dust. Now, after more than a couple of lead changes in the profit derby, agribusiness and gold are neck and neck. The Market Vectors Agribusiness Fund (AMEX: MOO), an exchange-traded fund that tracks the DAXglobal Agribusiness Index, has ticked up 40% since its September 2007 launch. The SPDR Gold Shares Trust (NYSE Arca: GLD) just caught up with a 40% gain of its own.
Not that these two trackers have come to their present positions similarly, mind you. The correlation between them is only 30%. When one zigs, the other heads in a zaggy direction. Agribusiness, too, is much more volatile. Gold's almost stock-like standard deviation makes it, oddly enough, less risky than agribusiness.
But MOO's underlying index encompasses more than three dozen stocks in diverse lines of business. There's, of course, only one thing being tracked by the bullion trust. Normally, that kind of diversification would make for less volatility. When an index is populated by agrichemical companies like Agrium, Inc. (NYSE: AGU), however, that may not be the case.
Agrium is probably best known for its Vigoro-branded seeds and lawn care products, but the company supplies a wide range of other agricultural nutrients, chemicals and fertilizers.
The company's been a driver of the DAXglobal Agribusiness Index, making up nearly 5% of the benchmark's market capitalization. Since the launch of the Market Vectors Agribusiness Fund, Agrium's shot up 117%, though the stock's correlation to the ETF has weakened recently.
Heading into earnings season, Agrium's prospects continue to look rosy. Consensus earnings estimates are $3.21 a share now, but some analysts are more optimistic given the fact that Agrium came up with outsized earnings in the last two quarters. In the quarter ending in March, actual earnings were more than double analysts' estimates, following a 40% earnings surprise in the previous reporting period.
Nobody's expecting such grand outperformance when Agrium next releases its numbers August 9. In this environment, though, even modest upside surprises are welcomed.
..Brad Zigler seeking alpha
Well, truth be told, we actually compared agribusiness - chemical and equipment production related to raising grain, together with other agriculture ventures in livestock and oilseeds - to the yellow metal.
Back in November, agribusiness stocks were leaving gold in the dust. Now, after more than a couple of lead changes in the profit derby, agribusiness and gold are neck and neck. The Market Vectors Agribusiness Fund (AMEX: MOO), an exchange-traded fund that tracks the DAXglobal Agribusiness Index, has ticked up 40% since its September 2007 launch. The SPDR Gold Shares Trust (NYSE Arca: GLD) just caught up with a 40% gain of its own.
Not that these two trackers have come to their present positions similarly, mind you. The correlation between them is only 30%. When one zigs, the other heads in a zaggy direction. Agribusiness, too, is much more volatile. Gold's almost stock-like standard deviation makes it, oddly enough, less risky than agribusiness.
But MOO's underlying index encompasses more than three dozen stocks in diverse lines of business. There's, of course, only one thing being tracked by the bullion trust. Normally, that kind of diversification would make for less volatility. When an index is populated by agrichemical companies like Agrium, Inc. (NYSE: AGU), however, that may not be the case.
Agrium is probably best known for its Vigoro-branded seeds and lawn care products, but the company supplies a wide range of other agricultural nutrients, chemicals and fertilizers.
The company's been a driver of the DAXglobal Agribusiness Index, making up nearly 5% of the benchmark's market capitalization. Since the launch of the Market Vectors Agribusiness Fund, Agrium's shot up 117%, though the stock's correlation to the ETF has weakened recently.
Heading into earnings season, Agrium's prospects continue to look rosy. Consensus earnings estimates are $3.21 a share now, but some analysts are more optimistic given the fact that Agrium came up with outsized earnings in the last two quarters. In the quarter ending in March, actual earnings were more than double analysts' estimates, following a 40% earnings surprise in the previous reporting period.
Nobody's expecting such grand outperformance when Agrium next releases its numbers August 9. In this environment, though, even modest upside surprises are welcomed.
..Brad Zigler seeking alpha
Tuesday, July 15, 2008
Materials ETF Helps You Benefit From the Boom
Sector selection has been a big topic lately, as the market diverges, with sectors such as financials and homebuilders way down, while other sectors soar.
Both materials and energy have been the poster children for success through both the bull market that ended last fall and the most recent bear phase, as demand and prices for oil and commodities have been going up, and may go higher regardless of the fundamental reality.
The Materials Sector SPDR (XLB - Cramer's Take - Stockpickr) might be a way to benefit from the boom. Based on average volume of 10.9 million shares, the Street seems to agree and why not, over the last two years XLB is up 20% while the S&P 500 has been flat.
Unfortunately XLB, while it has been a good way to add performance versus a broad index like the S&P 500, has not really been a great way to capture the materials sector.
What has been behind the move in materials? Increased global demand for natural resources but unfortunately XLB is far heavier in chemical companies like DuPont(DD - Cramer's Take - Stockpickr) than purer resource companies.
Chemical companies are often consumers of natural resources so as the price of oil and other commodities have risen this has caused input prices to rise. Obviously a higher cost of doing business creates a drag on operating results.
The better performance during the commodity renaissance has come from, mostly foreign, mining stocks or thought of another way the companies that benefit from those higher input costs. This is where the iShares S&P Global Materials Sector Index Fund(MXI - Cramer's Take - Stockpickr) comes in. XLB is domestic stocks only and as mentioned mostly from chemical sub-sector. MXI only allocates 20.34% to the US and the vast majority of stocks are from the mining group.
BHP Billiton is the largest stock in the fund at about 10% (the sum of the UK and Australian listings). Also figuring prominently in the mix is Rio Tinto (RTP - Cramer's Take - Stockpickr), Vale (RIO - Cramer's Take - Stockpickr), Anglo American(AAUK - Cramer's Take - Stockpickr) and even a couple of the ag plays, like Potash Corp. of Saskatchewan (POT - Cramer's Take - Stockpickr) and Monsanto (MON - Cramer's Take - Stockpickr) have grown into prominence in the fund.
Other large country weights besides the U.S. are the U.K. 14.93%, Australia 9.81% and Canada 9.58%.
This article is not about MXI, XLB or materials in general, it is about the need to look under the hood when trying to figure out what product offers the best way into a sector and the realization that the best way today may not be the best way in a few months.
Sticking with the materials sector, if input costs for chemical companies go down then XLB, or for that matter iShares DJ Basic Materials Index Fund (IYM - Cramer's Take - Stockpickr), would look more attractive on a relative basis, and should be expected to outperform MXI in a world where prices for natural resources were declining.
In selecting a particular product as a proxy for a sector, it is important to know the current trends moving that sector and to follow any changes that occur.
One example of the importance of staying current would be the industrial sector: General Electric(GE - Cramer's Take - Stockpickr) weighs prominently in any of the cap-weighted industrial ETFs. GE has done poorly for years and has dropped 35% since last fall.
The simple act of seeking an industrial fund that either did not own GE or did not own a lot of it has been an excellent way to add value within the sector for the last couple of years.
The Industrial Sector SPDR (XLI - Cramer's Take - Stockpickr) allocates 16% to GE while the PowerShares Water Portfolio (PHO - Cramer's Take - Stockpickr) only 3%. This has been a big difference maker, over the last two and half years PHO is up 30% and XLI is up mid-single digits.
Just as PHO has done better for its much smaller weight to GE, it will be just as sure that when GE finally does provide leadership again, XLI will outperform PHO.
Sector selection is important, but how a sector is accessed once selected is just as important.
Both materials and energy have been the poster children for success through both the bull market that ended last fall and the most recent bear phase, as demand and prices for oil and commodities have been going up, and may go higher regardless of the fundamental reality.
The Materials Sector SPDR (XLB - Cramer's Take - Stockpickr) might be a way to benefit from the boom. Based on average volume of 10.9 million shares, the Street seems to agree and why not, over the last two years XLB is up 20% while the S&P 500 has been flat.
Unfortunately XLB, while it has been a good way to add performance versus a broad index like the S&P 500, has not really been a great way to capture the materials sector.
What has been behind the move in materials? Increased global demand for natural resources but unfortunately XLB is far heavier in chemical companies like DuPont(DD - Cramer's Take - Stockpickr) than purer resource companies.
Chemical companies are often consumers of natural resources so as the price of oil and other commodities have risen this has caused input prices to rise. Obviously a higher cost of doing business creates a drag on operating results.
The better performance during the commodity renaissance has come from, mostly foreign, mining stocks or thought of another way the companies that benefit from those higher input costs. This is where the iShares S&P Global Materials Sector Index Fund(MXI - Cramer's Take - Stockpickr) comes in. XLB is domestic stocks only and as mentioned mostly from chemical sub-sector. MXI only allocates 20.34% to the US and the vast majority of stocks are from the mining group.
BHP Billiton is the largest stock in the fund at about 10% (the sum of the UK and Australian listings). Also figuring prominently in the mix is Rio Tinto (RTP - Cramer's Take - Stockpickr), Vale (RIO - Cramer's Take - Stockpickr), Anglo American(AAUK - Cramer's Take - Stockpickr) and even a couple of the ag plays, like Potash Corp. of Saskatchewan (POT - Cramer's Take - Stockpickr) and Monsanto (MON - Cramer's Take - Stockpickr) have grown into prominence in the fund.
Other large country weights besides the U.S. are the U.K. 14.93%, Australia 9.81% and Canada 9.58%.
This article is not about MXI, XLB or materials in general, it is about the need to look under the hood when trying to figure out what product offers the best way into a sector and the realization that the best way today may not be the best way in a few months.
Sticking with the materials sector, if input costs for chemical companies go down then XLB, or for that matter iShares DJ Basic Materials Index Fund (IYM - Cramer's Take - Stockpickr), would look more attractive on a relative basis, and should be expected to outperform MXI in a world where prices for natural resources were declining.
In selecting a particular product as a proxy for a sector, it is important to know the current trends moving that sector and to follow any changes that occur.
One example of the importance of staying current would be the industrial sector: General Electric(GE - Cramer's Take - Stockpickr) weighs prominently in any of the cap-weighted industrial ETFs. GE has done poorly for years and has dropped 35% since last fall.
The simple act of seeking an industrial fund that either did not own GE or did not own a lot of it has been an excellent way to add value within the sector for the last couple of years.
The Industrial Sector SPDR (XLI - Cramer's Take - Stockpickr) allocates 16% to GE while the PowerShares Water Portfolio (PHO - Cramer's Take - Stockpickr) only 3%. This has been a big difference maker, over the last two and half years PHO is up 30% and XLI is up mid-single digits.
Just as PHO has done better for its much smaller weight to GE, it will be just as sure that when GE finally does provide leadership again, XLI will outperform PHO.
Sector selection is important, but how a sector is accessed once selected is just as important.
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