As the dust settles in Tahrir Square and investors try to make sense of the messages sent by protestors, it is important to take a step back to gain insight. While the main take-away from these protests is seemingly that citizens are fed up with having their rights abused and voices stifled by autocratic regimes, if one takes a simple look at the very beginnings of these protests one can easily find a call to the market and subsequently to investors: Inflation is sending food prices higher throughout the developing world. The UN reported that prices for food commodities are up 28% over the past year. This has a huge impact in the developing world. On average, 80% of incomes in developing countries goes on food.
As agricultural commodities prices have risen, households have felt a severe pinch. Thus, before chants became overtly political, protestors in the Maghreb—where the events sweeping the entire region took root—were reclaiming basic commodities at more reasonable prices.
The events in the Middle East, while a very visible catalyst of commodities prices, are in no way isolated indicators of a massive growth in demand for agricultural commodities and the products and services rendered to producers of these commodities. To once again beat a dead horse, the population is growing and not only that, it is getting richer. With increased population and purchasing power there is a steady, growing demand for food. It is as simple as that. While one could try to play the demographics game more tightly and focus investments in companies with outsized exposure to certain growth markets, we feel confident that the traditional players we’ve found along with a Brazilian name offer a good first look for investors who are committed to this investment thesis.
We don’t advocate speculating on the agricultural commodities market, but rather suggest that investors might find opportunities to invest with companies that benefit from these two “mega trends” Amongst the many lessons we can pull from the events unfolding on the streets of the Middle East, from Tunis to Manama, is that commodity prices are rising and the world is going to need more food over the next century. Here are some names that will continue to respond to the world’s food needs. We believe these names are a good starting point for your research but think many are currently trading at high multiples. Investors would be well advised to wait for a pullback before picking up shares. If you’re looking for 2 other ideas to profit from the Middle East uprising, check out the article we published on Friday.
The Mosaic Company (MOS) With a market capitalization just over $37 billion this giant of the fertilizer world is prepared to feed to the soil that grows the world’s agricultural diet. What’s more, it vertically integrates the production of two of the three core inputs, potash and phosphate, that go into its fertilizer product. Despite a very bullish run in the past year, as recently as late January, RBC Capital Markets reiterated its outperform rating for the company. However, we believe shares are overvalued on a discounted cash flow basis, and investors would be advised to add a position on a pullback.
Potash Corporation of Saskatchewan (POT) The eponymous producer of the fertilizer input, PotashCorp, maintains its number one position globally in the potash game. If you listen to the analysts over at UBS, which as with all analysts we would caution you to do with prudence, PotashCorp might well be gold. Despite a massive run up in the price of the stock, UBS reiterated a buy rating for the stock at the end of January. Its quick rise might mean it is due for a price correction in the short term, but it remains a fundamentally sound name in its space.
CF Industries Holdings Inc. (CF) A smaller player with a regionally concentrated market in the central United States, CF Holdings is another fertilizer name that has steady growth prospects for the long term. Its 5-year projected EPS are 8.5%. it should be noted that it, like others in the sector, has experienced a marked run up in its stock price recently. Investors may want to keep an eye on it to see if its price comes in line with their own calculations for an allocation in their portfolios.
Monsanto Company (MON) Generating revenues in excess of $10 billion in 2010, this Midwest firm with global reach defined the space that it operates in: seed production. Seed production, specifically the R&D that goes into seed engineering, may well hold the answer to increasing crop yields. With fixed land inputs and growing demand it may well be the investment best aligned with alleviating hunger in the world. As we detailed here, we think Monsanto should be a name on investors’ watchlists.
Syngenta Corp. (SYT) With over 4 billion dollars of cash on hand and a one-year forward EPS projection of nearly 25% Syngenta is a solid name. This Swiss company competes in two major agricultural arenas: crop protection and seed production. Given that it is an underdog amongst the more established genetically modified seed producers, Monsanto and DuPont (DD), it may well be this mentality that drives it to continue its aggressive investment in R&D and succeed in closing that gap and sating global appetites.
Archer-Daniels Midland Company (ADM) Income and revenue have jumped nearly a third YoY for ADM with a 5-year EPS projection of a very steady and respectable 8%. The company is heavily involved in ethanol so investors strongly committed to this play or those simply looking to add a bit of ethanol exposure to their books without direct commodities investments might be attracted to this venerable name.
Deere & Company (DE) If ever there was a name brand in the agriculture business the iconic John Deere tractor is it. This behemoth of agricultural machinery manufacturing controls more than 50% of the US market, but has seen the growth of its non-US sales rate tear upward and away from its US sales rate in recent years. The company has outperformed over the past 12 months, but so long as you believe in the broader macro thesis and subscribe to the brand loyalty Deere has built and its long history of competitive innovation you might consider adding it to your portfolio.
Brasil Foods S.A. (BRF) Brasil Foods distributes thousands of products to over 100 countries. It is a leader amongst Brazilian food companies. To the many consumers of its frozen food products it is more commonly known by its public-facing name of Perdigao. With a middle class constituting a majority of the population for the first time in Brazil it bodes well for demand of the pre-made meals on offer. It should be noted though, that the stock itself has performed well and is currently trading at the top of its 52-week band.
MarketVectors Agribusiness ETF (MOO) A good way to buy exposure into the agricultural space that diversifies your company-by-company allocation is this ETF that is strongly geared toward the big names of the industry. Its top holdings include, in order, Monsanto, Potash, Mosaic, Deere & Co. and Singapor traded Wilmar International. Indicative of the interest in the sector generally, the daily volume of MOO shares has spiked significantly over the past month and half.
Tuesday, February 22, 2011
Fertilizer Kings Agrium, Potash Fall To 10-Week Lines
Three Canadian fertilizer makers, all on the uptrend, may be building entry points. Yet one of the three must first regain its 10-week moving average, where on Tuesday they all retreated.
Grain prices have been rising for months. Bad crops have restricted supply, while new consumers among the populations of China, India and other emerging markets are boosting demand. Ethanol, too, is a driving force for corn, especially as oil prices move higher.
Those high grain prices translated into bigger demand for fertilizer, even as those prices climbed.
Farmers, watching corn, wheat and bean prices double and triple, scrambled to put more acreage into production.
But ag markets suffered a big reversal Tuesday on speculation that Ukraine may remove export restrictions for wheat. Profit taking pushed that market to steep losses, and the urge to purge long positions spread to corn and soybeans.
Are these grains entering a bear market? Is the ride over for fertilizer makers? Maybe, but you're best off letting the market guide you into, or away from, Potash Corp. of Saskatchewan (POT), Mosaic (MOS) and Agrium (AGU).
These three highly rated stocks fell to their 10-week lines on Tuesday in heavy volume, not the best way to show such a retreat.
Potash's 10-week line came in at 169.78, Mosaic's at 79.48 and Agrium's at 91.31.
This is the second such retreat for Agrium and Mosaic since they broke out from cup-shaped bases on Dec. 29. Mosaic's volume didn't kick in until Jan. 5 in response to the company's fiscal Q2 report for the period ended in November.
Potash achieved its first 10-week-line retreat since its breakout, also on Dec. 29.
Potash, the target of a failed takeover bid by BHP Billiton (BHP), boosted its EPS in the past four quarters by 224%, 154%, 61% and 124%. Sales rose 43% to 86% in those periods, all compared with weak year-earlier results.
Potash leads its two rivals by annual pretax margin (38% in 2010) and return on equity (28%).
Consensus estimates peg Potash's EPS gain at 52% for 2011.
Mosaic logged triple-digit profit gains in three of the past four quarters, with one result compared with a year-earlier loss. Sales rose in the past four quarters 17% to 56%.
Mosaic is expected to improve its bottom line 113% in fiscal 2011, which ends in May. For 2012, look for 27% growth.
Agrium, with a December-ending fiscal year, is expected to boost its EPS 52% in 2011. Its EPS growth accelerated the past two quarters, from 30% to 78% to 225%.
When the closing bell rang, Potash finished 6% lower, Mosaic 3% lower, both barely above their 10-week line.
Agrium also lost 3% and is about 1% below its 10-week line. But the approach is the same for all three: Buying so near the line after a high-volume fall is perilous. Look for a bounce with solid turnover to confirm that buyers are coming in.
Grain prices have been rising for months. Bad crops have restricted supply, while new consumers among the populations of China, India and other emerging markets are boosting demand. Ethanol, too, is a driving force for corn, especially as oil prices move higher.
Those high grain prices translated into bigger demand for fertilizer, even as those prices climbed.
Farmers, watching corn, wheat and bean prices double and triple, scrambled to put more acreage into production.
But ag markets suffered a big reversal Tuesday on speculation that Ukraine may remove export restrictions for wheat. Profit taking pushed that market to steep losses, and the urge to purge long positions spread to corn and soybeans.
Are these grains entering a bear market? Is the ride over for fertilizer makers? Maybe, but you're best off letting the market guide you into, or away from, Potash Corp. of Saskatchewan (POT), Mosaic (MOS) and Agrium (AGU).
These three highly rated stocks fell to their 10-week lines on Tuesday in heavy volume, not the best way to show such a retreat.
Potash's 10-week line came in at 169.78, Mosaic's at 79.48 and Agrium's at 91.31.
This is the second such retreat for Agrium and Mosaic since they broke out from cup-shaped bases on Dec. 29. Mosaic's volume didn't kick in until Jan. 5 in response to the company's fiscal Q2 report for the period ended in November.
Potash achieved its first 10-week-line retreat since its breakout, also on Dec. 29.
Potash, the target of a failed takeover bid by BHP Billiton (BHP), boosted its EPS in the past four quarters by 224%, 154%, 61% and 124%. Sales rose 43% to 86% in those periods, all compared with weak year-earlier results.
Potash leads its two rivals by annual pretax margin (38% in 2010) and return on equity (28%).
Consensus estimates peg Potash's EPS gain at 52% for 2011.
Mosaic logged triple-digit profit gains in three of the past four quarters, with one result compared with a year-earlier loss. Sales rose in the past four quarters 17% to 56%.
Mosaic is expected to improve its bottom line 113% in fiscal 2011, which ends in May. For 2012, look for 27% growth.
Agrium, with a December-ending fiscal year, is expected to boost its EPS 52% in 2011. Its EPS growth accelerated the past two quarters, from 30% to 78% to 225%.
When the closing bell rang, Potash finished 6% lower, Mosaic 3% lower, both barely above their 10-week line.
Agrium also lost 3% and is about 1% below its 10-week line. But the approach is the same for all three: Buying so near the line after a high-volume fall is perilous. Look for a bounce with solid turnover to confirm that buyers are coming in.
Running Like A Deere
When crop prices are high, there is a go-to line-up of stocks for theme investors to play. Fertilizer names like Potash (NYSE:POT) and Mosiac (NYSE:MOS) usually catch a bid, as do seed companies like Syngenta (NYSE:SYT). And then there are the machinery companies - stocks like AGCO (Nasdaq:AGCO), CNH Global (NYSE:CNH) and the biggest of them all, Deere (NYSE:DE). Whether the logic always works out as expected (high crop prices produce more cash for farmers who can buy new equipment) or not, these have been bullish times for crops and bullish times for Deere's stock.
The Quarter That WasWhether the byproduct of high crop prices, better credit access, more optimism among farmers, or some combination, Deere delivered another strong quarter. Revenue rose 30% this period to over $5.5 billion, with agriculture (and turf) up 21% and construction (and forestry) up 81% from a low base. Although that was a solid jump in sales, it was nevertheless below the average analyst estimate of $5.67 billion.
Like most heavy machinery manufacturers, Deere's business is more profitable when the factories have solid throughput. To that end, higher revenue helped enable improved gross margin (up about 150 basis points from last year). Deere's management also deserves praise for holding the line on operating expenses, as operating income more than doubled and the operating margin expanded by more the four points. As a result, though Deere came up short on revenue the company handily surpassed the average EPS estimate. (For more, see 4 Things to Know About Earnings Season.)
The Look AheadThese are good times to be a farmer in the western hemisphere. Floods have damaged crops in Australia and Africa, while droughts have severely damaged yields in Russia and Ukraine this year. That has all contributed to much-publicized jumps in food prices and unrest in many parts of the world. Couple that with improved credit conditions in North America and Brazil's ongoing willingness to subsidize loans for its farmers, and the demand picture over here is rather healthy.
At some point, though, it is worth wondering if Deere is going to see a squeeze from cost inputs. Companies like AK Steel (NYSE:AKS) and Nucor (NYSE:NUE) have pushed through steel price increases and they seem to be sticking. What's more, component companies like Eaton (NYSE:ETN) and Titan (NYSE:TWI) are looking to pass on their own cost/price increases as well. So with Deere having increased its production tonnage by 41% this last quarter, how long will it be before costs squeeze margins? (For more, see Prepare Your Portfolio For Higher Food Prices.)
The Bottom LineWhen a theme trade is running, it is almost pointless to talk at much length about valuation and fair prices for stocks. Deere is the biggest and quite possibly the best-run agricultural machinery company out there, so it seems pretty clear that the stock is going to attract buyers when investors want ag exposure. AGCO, CNH and Kubota (NYSE:KUB) all look cheaper than Deere, but there is no particular reason to think there will be a big catch-up trade on the basis of valuation.
If investors have a particular notion that European demand will pick up (relatively better news for CNH) or that Asian demand will be strong (good for Kubota), that could be a valid reason to trade away from Deere. Failing that, so long as the ag trade remains popular, it's likely that Deere's stock will stay popular. (For more, see Deere Keeps Plowing.)
The Quarter That WasWhether the byproduct of high crop prices, better credit access, more optimism among farmers, or some combination, Deere delivered another strong quarter. Revenue rose 30% this period to over $5.5 billion, with agriculture (and turf) up 21% and construction (and forestry) up 81% from a low base. Although that was a solid jump in sales, it was nevertheless below the average analyst estimate of $5.67 billion.
Like most heavy machinery manufacturers, Deere's business is more profitable when the factories have solid throughput. To that end, higher revenue helped enable improved gross margin (up about 150 basis points from last year). Deere's management also deserves praise for holding the line on operating expenses, as operating income more than doubled and the operating margin expanded by more the four points. As a result, though Deere came up short on revenue the company handily surpassed the average EPS estimate. (For more, see 4 Things to Know About Earnings Season.)
The Look AheadThese are good times to be a farmer in the western hemisphere. Floods have damaged crops in Australia and Africa, while droughts have severely damaged yields in Russia and Ukraine this year. That has all contributed to much-publicized jumps in food prices and unrest in many parts of the world. Couple that with improved credit conditions in North America and Brazil's ongoing willingness to subsidize loans for its farmers, and the demand picture over here is rather healthy.
At some point, though, it is worth wondering if Deere is going to see a squeeze from cost inputs. Companies like AK Steel (NYSE:AKS) and Nucor (NYSE:NUE) have pushed through steel price increases and they seem to be sticking. What's more, component companies like Eaton (NYSE:ETN) and Titan (NYSE:TWI) are looking to pass on their own cost/price increases as well. So with Deere having increased its production tonnage by 41% this last quarter, how long will it be before costs squeeze margins? (For more, see Prepare Your Portfolio For Higher Food Prices.)
The Bottom LineWhen a theme trade is running, it is almost pointless to talk at much length about valuation and fair prices for stocks. Deere is the biggest and quite possibly the best-run agricultural machinery company out there, so it seems pretty clear that the stock is going to attract buyers when investors want ag exposure. AGCO, CNH and Kubota (NYSE:KUB) all look cheaper than Deere, but there is no particular reason to think there will be a big catch-up trade on the basis of valuation.
If investors have a particular notion that European demand will pick up (relatively better news for CNH) or that Asian demand will be strong (good for Kubota), that could be a valid reason to trade away from Deere. Failing that, so long as the ag trade remains popular, it's likely that Deere's stock will stay popular. (For more, see Deere Keeps Plowing.)
Saturday, February 12, 2011
3 China Agriculture Stocks for 2011
NEW YORK (TheStreet) -- In 2011, agricultural commodities prices will depend on crop prospects, according to a Food and Agriculture Organization (FAO) report. A sharp deterioration in crop outlook will affect price movements adversely. The FAO's index of 55 food commodities rose for the fifth straight month in November, touching two-year highs. Unless the global output of agricultural commodities improves in 2011, food prices will continue to spiral up, according to FAO.
Chinese Reverse Mergers
SEC Probes China Stock Fraud NetworkShort Sellers and China StocksSmall Cast Stars in China Reverse MergersAuditors Play Defense on China StocksDealmaker's Long Trip Through China RTOChina RTO Regulation Shows CracksChina Stock Fraud News Already Priced InSEC's Smart Step at Fighting China FraudM&A Wizard Says He Was FleecedFree Pass for FraudWhat Probe Means for China ETFsHow China Small-Caps Can Come Clean:
OpinionMarket Activity
Monsanto Company| MON Potash Corporation of Saskatchewan Inc.| POT Yongye International Inc.| YONG Prices of agricultural commodities will rally next year, driven by rising demand from emerging markets, as per Rabobank Group. In addition, surging crude oil prices, depleting global food stockpiles and a weakening dollar may push prices higher.
If energy and food prices surge, it would raise the attractiveness of biofuels, made from farm commodities, pushing fertilizer prices higher. Down the value chain of commodities, any upward movement in energy prices affects sugar and corn prices.
A recent Chinese commerce ministry statement said as pressure mounts due to escalating prices and tight supplies, acquiring new supplies will play a key role in softening inflation and curbing speculation. For this, China has decided to tap international markets for sugar, cotton and meat, especially from India and the U.S., among others.
While China's CPI closely correlates to food prices, the country recorded a 5.1% CPI growth in November, with food and household expenses contributing 92%. Among agricultural commodities, as grain prices increase, food production costs and beverage processing costs rise.
We have identified three China agriculture stocks that will likely provide attractive returns to investors. These stocks are stacked base on upside potential.
China Agritech(CAGC), operating through its subsidiaries, manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers, and related agricultural products in China. Of all the analysts covering the stock, 75% recommend a buy. The stock has a 32.5% upside based on the consensus target price.
During the first nine months of 2010, the company posted a 41% year-over-year increase in net revenue, while cash equivalents more than doubled, indicating a strong financial base. Looking ahead into the fourth quarter and upcoming year, Agritech said prices of agricultural products are on a roll and it is leveraging the favorable trend to achieve its annual target. Analysts at Bloomberg estimate Agritech's fourth quarter revenue at $31.3 million, compared to $23.9 million recorded in the third quarter.
Agritech recently opened the first branded large-scale distribution center in Henan province and plans to construct more such facilities in 2011. Each of these would cover 85-100 franchised stores, which will sell 50% of the company's products and 50% of third-party products. On one hand, the cost of building one distribution center is almost $1 million, while on the other, annual revenue contribution is estimated at $3.7 million, once the plant becomes operational.
Zhongpin(HOGS_) is engaged in the processing and distribution of meat and food products in China. Of all the analysts covering the stock, 78% recommend a buy. While there is no sell rating on the stock, the remaining analysts recommend a hold. Zhongpin has a 36.4% upside based on the consensus target price. Based on the positive trend in pork prices and the company's significant capex plans, the stock seems attractive and is likely to generate handsome returns in 2011.
Zhongpin has filed a registration for a potential equity offer, debt, and/or other instruments to raise up to $250 million, as per company sources. The main aim of the registration is gaining additional flexibility for raising funds from equity in 2011, in the event of interest rate hikes and a credit crunch. Meanwhile, timing and offer price have not been disclosed in the registration filed.
Zhongpin recently announced plans to build a production, research and development, test, and training complex in its home city Changge in Henan, China. The company plans to invest $58.5 million on the facility and construction for the first phase with a capacity of 50,000 metric tons is scheduled to start in the first quarter of 2011 and will be completed in third quarter of 2011. With this facility, the company will be adding 100,000 metric tons of capacity for prepared pork products.
Yongye International(YONG_) operating through its subsidiary, is engaged in the manufacture, research and development, and sale of fulvic acid-based liquid and powder nutrient compounds used in the agriculture industry. Of all the analysts covering the stock, 80% recommend a buy. Yongye has a 85.4% upside based on the consensus target price.
At the end of 2010 third quarter, the company had a gross margin of 58.7%, sales growth of 145.1%, and a trailing 12-month sale of $196.2 million. Among peers in the fertilizer and agricultural chemical industries, Yongye has the highest gross margin, indicating investment potential. In comparison, Monsanto(MON_) and Potash Corporation of Saskatchewan(POT_) have gross margins of 44.1% and 35.8%, respectively.
After reporting third quarter results, the company achieved its set target for the full year 2010 within a span of three quarters. For 2010, the company sees revenues ranging between $200 and $205 million, and adjusted net income to increase in the range of 90.8% to 98.4% from prior year levels. Looking ahead, the company estimates at least a 50% annual growth rate in its revenue in 2011 and 2012.
Chinese Reverse Mergers
SEC Probes China Stock Fraud NetworkShort Sellers and China StocksSmall Cast Stars in China Reverse MergersAuditors Play Defense on China StocksDealmaker's Long Trip Through China RTOChina RTO Regulation Shows CracksChina Stock Fraud News Already Priced InSEC's Smart Step at Fighting China FraudM&A Wizard Says He Was FleecedFree Pass for FraudWhat Probe Means for China ETFsHow China Small-Caps Can Come Clean:
OpinionMarket Activity
Monsanto Company| MON Potash Corporation of Saskatchewan Inc.| POT Yongye International Inc.| YONG Prices of agricultural commodities will rally next year, driven by rising demand from emerging markets, as per Rabobank Group. In addition, surging crude oil prices, depleting global food stockpiles and a weakening dollar may push prices higher.
If energy and food prices surge, it would raise the attractiveness of biofuels, made from farm commodities, pushing fertilizer prices higher. Down the value chain of commodities, any upward movement in energy prices affects sugar and corn prices.
A recent Chinese commerce ministry statement said as pressure mounts due to escalating prices and tight supplies, acquiring new supplies will play a key role in softening inflation and curbing speculation. For this, China has decided to tap international markets for sugar, cotton and meat, especially from India and the U.S., among others.
While China's CPI closely correlates to food prices, the country recorded a 5.1% CPI growth in November, with food and household expenses contributing 92%. Among agricultural commodities, as grain prices increase, food production costs and beverage processing costs rise.
We have identified three China agriculture stocks that will likely provide attractive returns to investors. These stocks are stacked base on upside potential.
China Agritech(CAGC), operating through its subsidiaries, manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers, and related agricultural products in China. Of all the analysts covering the stock, 75% recommend a buy. The stock has a 32.5% upside based on the consensus target price.
During the first nine months of 2010, the company posted a 41% year-over-year increase in net revenue, while cash equivalents more than doubled, indicating a strong financial base. Looking ahead into the fourth quarter and upcoming year, Agritech said prices of agricultural products are on a roll and it is leveraging the favorable trend to achieve its annual target. Analysts at Bloomberg estimate Agritech's fourth quarter revenue at $31.3 million, compared to $23.9 million recorded in the third quarter.
Agritech recently opened the first branded large-scale distribution center in Henan province and plans to construct more such facilities in 2011. Each of these would cover 85-100 franchised stores, which will sell 50% of the company's products and 50% of third-party products. On one hand, the cost of building one distribution center is almost $1 million, while on the other, annual revenue contribution is estimated at $3.7 million, once the plant becomes operational.
Zhongpin(HOGS_) is engaged in the processing and distribution of meat and food products in China. Of all the analysts covering the stock, 78% recommend a buy. While there is no sell rating on the stock, the remaining analysts recommend a hold. Zhongpin has a 36.4% upside based on the consensus target price. Based on the positive trend in pork prices and the company's significant capex plans, the stock seems attractive and is likely to generate handsome returns in 2011.
Zhongpin has filed a registration for a potential equity offer, debt, and/or other instruments to raise up to $250 million, as per company sources. The main aim of the registration is gaining additional flexibility for raising funds from equity in 2011, in the event of interest rate hikes and a credit crunch. Meanwhile, timing and offer price have not been disclosed in the registration filed.
Zhongpin recently announced plans to build a production, research and development, test, and training complex in its home city Changge in Henan, China. The company plans to invest $58.5 million on the facility and construction for the first phase with a capacity of 50,000 metric tons is scheduled to start in the first quarter of 2011 and will be completed in third quarter of 2011. With this facility, the company will be adding 100,000 metric tons of capacity for prepared pork products.
Yongye International(YONG_) operating through its subsidiary, is engaged in the manufacture, research and development, and sale of fulvic acid-based liquid and powder nutrient compounds used in the agriculture industry. Of all the analysts covering the stock, 80% recommend a buy. Yongye has a 85.4% upside based on the consensus target price.
At the end of 2010 third quarter, the company had a gross margin of 58.7%, sales growth of 145.1%, and a trailing 12-month sale of $196.2 million. Among peers in the fertilizer and agricultural chemical industries, Yongye has the highest gross margin, indicating investment potential. In comparison, Monsanto(MON_) and Potash Corporation of Saskatchewan(POT_) have gross margins of 44.1% and 35.8%, respectively.
After reporting third quarter results, the company achieved its set target for the full year 2010 within a span of three quarters. For 2010, the company sees revenues ranging between $200 and $205 million, and adjusted net income to increase in the range of 90.8% to 98.4% from prior year levels. Looking ahead, the company estimates at least a 50% annual growth rate in its revenue in 2011 and 2012.
Friday, February 11, 2011
How Long Can Mosaic's Dividends Last?
Whether you're a beginning investor or a near-retiree, the importance of purchasing stocks that pay dividends cannot be overstated. Not only do companies that have quarterly or annual payouts provide you with a steady stream of income, they also have the potential for capital appreciation. Simply put, dividend stocks can you give your portfolio what almost no other investment can -- both income and growth.
At The Motley Fool, we're avid fans of dividends -- and not just because we like that steady stream of cash. Studies have shown that from 1972 to 2006, stocks in the S&P 500 that don't pay dividends have earned an average annual return of 4.1%; dividend stocks, however, have averaged a whopping 10.1% per year. That is an incredible difference -- one that you'd be crazy to not take advantage of!
But investing in dividends can be dangerous -- companies can cut, slash, or suspend dividends at any time, often without notice. Fortunately, there are several warnings signs that may alert you, and these red flags could be the crucial factor in determining whether or not a company is likely to continue paying its dividend. Today, let's drill beneath the surface and check out Mosaic (NYSE: MOS).
What's on the surface?
Mosaic, which operates in the fertilizers and agricultural chemicals industry, currently pays a dividend of 0.23%. That dividend yield may not seem like much, but considering that over 100 companies in the S&P 500 don't pay anything at all, it's nothing to complain about. Plus, don't forget, dividends typically grow with time, so that 0.23% has the potential to skyrocket over time.
But what's more important than the dividend itself is Mosaic's ability to keep that cash rolling. The first thing to look at is the company's reported dividends versus its reported earnings. If you happen to see dividend payments that are growing faster than earnings per share, it may be an initial signal that something just isn't right. Check out the graph below for details of the last five years:
Clearly, there doesn't seem to be a problem, here. Mosaic has been able to boost its earnings at an adequate pace and keep its dividends in check at the same time.
The more secure, the better
One of the most common metrics that investors use to judge the safety of a dividend is the payout ratio. This number tells you what percentage of net income is paid out to investors in the form of a dividend. Normally, anything above 50% is cause to look a bit further. According to the most recent data, Mosaic's payout ratio is 4.60%. It's obvious that, at least on the surface, there aren't any problems with Mosaic generating enough income to support that nice dividend of 0.23%.
More important than checking out the payout ratio may be simply taking a peek at Mosaic's cash flow. Free cash flow -- all the cash left over after subtracting out capital expenditures -- is used by firms to make acquisitions, develop new products, and of course, pay dividends! We can use a simple metric called the cash flow coverage ratio, which is cash flow per share divided by dividends per share. Normally, anything above 1.2 should make you feel comfortable; anything less, and you may have a problem on your hands. Mosaic's coverage ratio is 7.67 -- which is more than enough cash on hand to keep pumping out that 0.23% yield. Barring any unforeseen circumstances, there really shouldn't be any major problems moving forward.
Either way, it's always beneficial to compare an investment with its most immediate competitors, so in the chart below, I've included the above metrics with those of Mosaic's closest competitors. In addition, I've included the five-year dividend growth rate, which is also a very important indicator. If Mosaic can illustrate that it's grown dividends over the past five years, then there's a good chance that it will continue to put shareholders first in the future.
The Foolish bottom line
Only you can decide what numbers you're comfortable with in the end; sometimes a higher yield and a higher reward means additional risk. However, when we look at Mosaic's payout ratio compared to its peer average, we see that it is a lower percentage, which illustrates that its dividend is probably more sustainable. The bottom line, however, is to make sure that with anything -- whether it be a dividend, a share repurchase, or an ordinary earnings report -- you do your own due diligence. Looking at all of the numbers in the best context possible is just the best place to start.
At The Motley Fool, we're avid fans of dividends -- and not just because we like that steady stream of cash. Studies have shown that from 1972 to 2006, stocks in the S&P 500 that don't pay dividends have earned an average annual return of 4.1%; dividend stocks, however, have averaged a whopping 10.1% per year. That is an incredible difference -- one that you'd be crazy to not take advantage of!
But investing in dividends can be dangerous -- companies can cut, slash, or suspend dividends at any time, often without notice. Fortunately, there are several warnings signs that may alert you, and these red flags could be the crucial factor in determining whether or not a company is likely to continue paying its dividend. Today, let's drill beneath the surface and check out Mosaic (NYSE: MOS).
What's on the surface?
Mosaic, which operates in the fertilizers and agricultural chemicals industry, currently pays a dividend of 0.23%. That dividend yield may not seem like much, but considering that over 100 companies in the S&P 500 don't pay anything at all, it's nothing to complain about. Plus, don't forget, dividends typically grow with time, so that 0.23% has the potential to skyrocket over time.
But what's more important than the dividend itself is Mosaic's ability to keep that cash rolling. The first thing to look at is the company's reported dividends versus its reported earnings. If you happen to see dividend payments that are growing faster than earnings per share, it may be an initial signal that something just isn't right. Check out the graph below for details of the last five years:
Clearly, there doesn't seem to be a problem, here. Mosaic has been able to boost its earnings at an adequate pace and keep its dividends in check at the same time.
The more secure, the better
One of the most common metrics that investors use to judge the safety of a dividend is the payout ratio. This number tells you what percentage of net income is paid out to investors in the form of a dividend. Normally, anything above 50% is cause to look a bit further. According to the most recent data, Mosaic's payout ratio is 4.60%. It's obvious that, at least on the surface, there aren't any problems with Mosaic generating enough income to support that nice dividend of 0.23%.
More important than checking out the payout ratio may be simply taking a peek at Mosaic's cash flow. Free cash flow -- all the cash left over after subtracting out capital expenditures -- is used by firms to make acquisitions, develop new products, and of course, pay dividends! We can use a simple metric called the cash flow coverage ratio, which is cash flow per share divided by dividends per share. Normally, anything above 1.2 should make you feel comfortable; anything less, and you may have a problem on your hands. Mosaic's coverage ratio is 7.67 -- which is more than enough cash on hand to keep pumping out that 0.23% yield. Barring any unforeseen circumstances, there really shouldn't be any major problems moving forward.
Either way, it's always beneficial to compare an investment with its most immediate competitors, so in the chart below, I've included the above metrics with those of Mosaic's closest competitors. In addition, I've included the five-year dividend growth rate, which is also a very important indicator. If Mosaic can illustrate that it's grown dividends over the past five years, then there's a good chance that it will continue to put shareholders first in the future.
The Foolish bottom line
Only you can decide what numbers you're comfortable with in the end; sometimes a higher yield and a higher reward means additional risk. However, when we look at Mosaic's payout ratio compared to its peer average, we see that it is a lower percentage, which illustrates that its dividend is probably more sustainable. The bottom line, however, is to make sure that with anything -- whether it be a dividend, a share repurchase, or an ordinary earnings report -- you do your own due diligence. Looking at all of the numbers in the best context possible is just the best place to start.
5-Star Stocks Poised to Pop: Chemical & Mining Co. of Chile
Based on the aggregated intelligence of 170,000-plus investors participating in Motley Fool CAPS, the Fool's free investing community, Latin fertilizer giant Chemical & Mining Co. of Chile (NYSE: SQM) has earned a coveted five-star ranking.
With that in mind, let's take a closer look at SQM's business and see what CAPS investors are saying about the stock right now.
Chemical & Mining Co. of Chile facts
Headquarters (Founded)
Santiago, Chile (1968)
Market Cap
$14.58 billion
Industry
Fertilizers and agricultural chemicals
Trailing-12-Month Revenue
$1.71 billion
Management
CEO Patricio Contesse (since 1990)
CFO Ricardo Ramos (since 1994)
Return on Equity (Average, Past 3 Years)
26.4%
Cash/Debt
$615.85 million / $1.3 billion
Dividend Yield
1.2%
Competitors
Agrium (NYSE: AGU)
Mosaic (NYSE: MOS)
PotashCorp (NYSE: POT)
Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.
On CAPS, 98% of the 1,251 members who have rated Chemical & Mining Co. of Chile believe the stock will outperform the S&P 500 going forward. These bulls include All-Stars DarthMaul09 and marc64, both of whom are ranked in the top 5% of our community.
Just last month, DarthMaul09 tapped Chemical & Mining Co. of Chile as a particularly powerful opportunity:
Lithium only represents a small part of the company's profits, most of it comes from fertilizer and other industrial chemicals. Lithium therefore has the potential to dramatically improve the company's revenue, especially if that next generation "miracle" battery ever becomes a reality. But for now the company will likely rise with the food commodity rally that may extend for most of this year.
Over the past three years, Chemical & Mining Co. of Chile has even grown its bottom line at a faster pace (27.7% per annum) than listed rivals Agrium (17.4%), FMC (NYSE: FMC) (9.2%), and PotashCorp (17.8%), as well as other fertilizer plays like Intrepid Potash (NYSE: IPI) (-7.9%) and Mosaic (27.2%).
CAPS member marc64 expands on the outperform case:
SQM is a potash fertilizer play in what looks to be a crunch year for food supplies, and maybe into the future. Whatever actually happens to food commodities, the farmer will be tempted to increase output.
Add to the fertilizer play, the sweet coincidence of electric cars hitting the market in a fairly big way this year. Count me among those who think the hum/whoosh of an all-electric car is much cooler than the din of exploding fossil fuels. ... It will take a while, but electric is compelling, and lithium is the high-performance choice for batteries.
The fact that SQM is the low-cost leader in lithium leverages up profit growth potential, and makes me feel a lot better about the high PE.
With that in mind, let's take a closer look at SQM's business and see what CAPS investors are saying about the stock right now.
Chemical & Mining Co. of Chile facts
Headquarters (Founded)
Santiago, Chile (1968)
Market Cap
$14.58 billion
Industry
Fertilizers and agricultural chemicals
Trailing-12-Month Revenue
$1.71 billion
Management
CEO Patricio Contesse (since 1990)
CFO Ricardo Ramos (since 1994)
Return on Equity (Average, Past 3 Years)
26.4%
Cash/Debt
$615.85 million / $1.3 billion
Dividend Yield
1.2%
Competitors
Agrium (NYSE: AGU)
Mosaic (NYSE: MOS)
PotashCorp (NYSE: POT)
Sources: Capital IQ (a division of Standard & Poor's) and Motley Fool CAPS.
On CAPS, 98% of the 1,251 members who have rated Chemical & Mining Co. of Chile believe the stock will outperform the S&P 500 going forward. These bulls include All-Stars DarthMaul09 and marc64, both of whom are ranked in the top 5% of our community.
Just last month, DarthMaul09 tapped Chemical & Mining Co. of Chile as a particularly powerful opportunity:
Lithium only represents a small part of the company's profits, most of it comes from fertilizer and other industrial chemicals. Lithium therefore has the potential to dramatically improve the company's revenue, especially if that next generation "miracle" battery ever becomes a reality. But for now the company will likely rise with the food commodity rally that may extend for most of this year.
Over the past three years, Chemical & Mining Co. of Chile has even grown its bottom line at a faster pace (27.7% per annum) than listed rivals Agrium (17.4%), FMC (NYSE: FMC) (9.2%), and PotashCorp (17.8%), as well as other fertilizer plays like Intrepid Potash (NYSE: IPI) (-7.9%) and Mosaic (27.2%).
CAPS member marc64 expands on the outperform case:
SQM is a potash fertilizer play in what looks to be a crunch year for food supplies, and maybe into the future. Whatever actually happens to food commodities, the farmer will be tempted to increase output.
Add to the fertilizer play, the sweet coincidence of electric cars hitting the market in a fairly big way this year. Count me among those who think the hum/whoosh of an all-electric car is much cooler than the din of exploding fossil fuels. ... It will take a while, but electric is compelling, and lithium is the high-performance choice for batteries.
The fact that SQM is the low-cost leader in lithium leverages up profit growth potential, and makes me feel a lot better about the high PE.
Investors warm up to big deals
The big takeover deal has come back, reflecting increased corporate confidence and economic recovery. What should hearten prospective deal makers is how the stock market has reacted to the transactions: It has loved them.
Across the globe, deal volume stands at $338 billion so far this year, a rate 25% higher than in the same period last year. And in the U.S., deal volume is more than double last year's rate, which makes 2011 the most active since 2008.
The deals are getting bigger, too. In 2011, there have been 12 deals valued above $5 billion, eight of them in the U.S., according to Dealogic. There were only two such deals in the U.S. at the same time last year.
For all their size, the deals have had little sizzle, serving to consolidate mostly coal-mining, utilities and exchange companies. There was Alpha Natural Resources Inc.'s $7.1 billion deal to buy Massey Energy Co., a $13.7 billion merger of utility companies Duke Energy Corp. and Progress Energy Inc., and this week, the planned deal between London Stock Exchange Group PLC and Canada's TMX Group Inc., the company that owns the Toronto and Montreal exchanges.
One of the big differences from past merger run-ups: Investors are sending the acquirers' stock prices up, not down, after the deals are made public.
Shareholder Approval
Stock owners of acquiring companies are showing support for big transactions.
Shares of iron-ore producer Cliffs Natural Resources Inc. rose nearly 3% on Jan. 11 after it announced a deal for rival iron-ore producer Consolidated Thompson Iron Mines Ltd. for about $5 billion.
On Monday, Danaher Corp. agreed to pay $5.87 billion for Beckman Coulter Inc., which makes diagnostic equipment used in medical testing. Danaher is paying a 45% premium on Beckman shares, usually a sum that sparks acquiring-company shareholders to fear the company is spending too much. But Danaher stock rose on the news, as investors cheered the industrial conglomerate's move into a new, high-growth sector of life sciences. Swelling middle-class populations in emerging markets such as China and India are expected to drive demand for preventive medical care, of which clinical testing is a central feature.
Deutsche Bank analyst Nigel Coe called the deal "strategically coherent" and said the low cost of financing the deal, given the state of credit markets right now, will add more to Danaher's earnings.
Wall Street has welcomed these deals because many of these industries were ripe for consolidation before the recession, but deal-making was put on hold as the debt markets shut down and companies preferred to hold on to their cash.
For instance, Deutsche Börse AG and NYSE Euronext talked seriously about a deal in 2008 and 2009, but the fragile global economy discouraged a cross-border merger. The two are now close to a tie-up to form a company with a putative market value of $25 billion, and a deal could be sealed next week. The Big Board's stock shot up as much as 18% on news of the latest talks, which followed Tuesday's merger news between the owners of the London and Toronto exchanges. Shares of those companies climbed 9% and 4%, respectively.
"We saw a time period in 2009 and even in early 2010 when CEOs were primarily focused on tactical opportunities, but today they're focused more on strategic opportunities," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch.
Danaher, for instance, has had its eye on diagnostics companies for years. It was a confluence of factors, including the improving economy, with "headwinds dissipating, tailwinds getting stronger," that helped it seal a deal for Beckman, Danaher Chief Executive Lawrence Culp said in an interview Monday.
Low interest rates, strong corporate performance in 2010 and a sense that the global economy is moving forward have put companies "back in the M&A game," he added.
Still, some deal makers noted that there is reason to be cautious, given the worries about the finances of some European governments as well as unexpected crises like the protests in the Middle East.
"Transformational deals are back," said Mark Shafir, head of global M&A at Citigroup. "Companies are willing to take more risks. But with six weeks behind us, it's early to declare victory."
In 2010, there were 65 deals around the world valued at more than $5 billion, compared to 132 such transactions in 2007, considered the heyday of the last merger wave.
Last month, agribusiness giant Cargill Inc. said it plans to give up its majority stake in fertilizer company Mosaic Co. in a transaction valued at about $24.3 billion. The move could make Mosaic, a leading seller of potash and phosphate, a more attractive takeover target.
Although private-equity firms have been largely absent from headline-grabbing transactions, they have competed for multibillion-dollar deals. Many observers expect that with attractive financing terms and the need to put capital to work, there will be several leveraged buyouts that hit $10 billion or more this year. Private-equity firms weren't able to hit that benchmark last year, although financing terms improved.
A group that included Apollo Management, Bain Capital and TPG Capital proposed acquiring Sara Lee Corp. for almost $19 per share. But the Downers Grove, Ill.-based company, which had sought at least $20 per share, rejected the offer as too low. Brazilian meats processor JBS SA was also interested in Sara Lee but faced difficulties raising financing to increase its bid.
"You're going to see a robust, pretty good quarter and first half, as long as the macroeconomic and geopolitical environment doesn't flare up," said Boon Sim, global head of M&A at Credit Suisse. Mr. Sim said he expects overall M&A activity this year to be up 30% over 2010.
Across the globe, deal volume stands at $338 billion so far this year, a rate 25% higher than in the same period last year. And in the U.S., deal volume is more than double last year's rate, which makes 2011 the most active since 2008.
The deals are getting bigger, too. In 2011, there have been 12 deals valued above $5 billion, eight of them in the U.S., according to Dealogic. There were only two such deals in the U.S. at the same time last year.
For all their size, the deals have had little sizzle, serving to consolidate mostly coal-mining, utilities and exchange companies. There was Alpha Natural Resources Inc.'s $7.1 billion deal to buy Massey Energy Co., a $13.7 billion merger of utility companies Duke Energy Corp. and Progress Energy Inc., and this week, the planned deal between London Stock Exchange Group PLC and Canada's TMX Group Inc., the company that owns the Toronto and Montreal exchanges.
One of the big differences from past merger run-ups: Investors are sending the acquirers' stock prices up, not down, after the deals are made public.
Shareholder Approval
Stock owners of acquiring companies are showing support for big transactions.
Shares of iron-ore producer Cliffs Natural Resources Inc. rose nearly 3% on Jan. 11 after it announced a deal for rival iron-ore producer Consolidated Thompson Iron Mines Ltd. for about $5 billion.
On Monday, Danaher Corp. agreed to pay $5.87 billion for Beckman Coulter Inc., which makes diagnostic equipment used in medical testing. Danaher is paying a 45% premium on Beckman shares, usually a sum that sparks acquiring-company shareholders to fear the company is spending too much. But Danaher stock rose on the news, as investors cheered the industrial conglomerate's move into a new, high-growth sector of life sciences. Swelling middle-class populations in emerging markets such as China and India are expected to drive demand for preventive medical care, of which clinical testing is a central feature.
Deutsche Bank analyst Nigel Coe called the deal "strategically coherent" and said the low cost of financing the deal, given the state of credit markets right now, will add more to Danaher's earnings.
Wall Street has welcomed these deals because many of these industries were ripe for consolidation before the recession, but deal-making was put on hold as the debt markets shut down and companies preferred to hold on to their cash.
For instance, Deutsche Börse AG and NYSE Euronext talked seriously about a deal in 2008 and 2009, but the fragile global economy discouraged a cross-border merger. The two are now close to a tie-up to form a company with a putative market value of $25 billion, and a deal could be sealed next week. The Big Board's stock shot up as much as 18% on news of the latest talks, which followed Tuesday's merger news between the owners of the London and Toronto exchanges. Shares of those companies climbed 9% and 4%, respectively.
"We saw a time period in 2009 and even in early 2010 when CEOs were primarily focused on tactical opportunities, but today they're focused more on strategic opportunities," said Jack MacDonald, co-head of Americas M&A at Bank of America Merrill Lynch.
Danaher, for instance, has had its eye on diagnostics companies for years. It was a confluence of factors, including the improving economy, with "headwinds dissipating, tailwinds getting stronger," that helped it seal a deal for Beckman, Danaher Chief Executive Lawrence Culp said in an interview Monday.
Low interest rates, strong corporate performance in 2010 and a sense that the global economy is moving forward have put companies "back in the M&A game," he added.
Still, some deal makers noted that there is reason to be cautious, given the worries about the finances of some European governments as well as unexpected crises like the protests in the Middle East.
"Transformational deals are back," said Mark Shafir, head of global M&A at Citigroup. "Companies are willing to take more risks. But with six weeks behind us, it's early to declare victory."
In 2010, there were 65 deals around the world valued at more than $5 billion, compared to 132 such transactions in 2007, considered the heyday of the last merger wave.
Last month, agribusiness giant Cargill Inc. said it plans to give up its majority stake in fertilizer company Mosaic Co. in a transaction valued at about $24.3 billion. The move could make Mosaic, a leading seller of potash and phosphate, a more attractive takeover target.
Although private-equity firms have been largely absent from headline-grabbing transactions, they have competed for multibillion-dollar deals. Many observers expect that with attractive financing terms and the need to put capital to work, there will be several leveraged buyouts that hit $10 billion or more this year. Private-equity firms weren't able to hit that benchmark last year, although financing terms improved.
A group that included Apollo Management, Bain Capital and TPG Capital proposed acquiring Sara Lee Corp. for almost $19 per share. But the Downers Grove, Ill.-based company, which had sought at least $20 per share, rejected the offer as too low. Brazilian meats processor JBS SA was also interested in Sara Lee but faced difficulties raising financing to increase its bid.
"You're going to see a robust, pretty good quarter and first half, as long as the macroeconomic and geopolitical environment doesn't flare up," said Boon Sim, global head of M&A at Credit Suisse. Mr. Sim said he expects overall M&A activity this year to be up 30% over 2010.
Sunday, February 6, 2011
Dupont stock to ride out agricultural boom-Barron's
NEW YORK, Feb 6 (Reuters) - U.S. chemicals group Dupont's (DD.N) shares could be one of the best ways for investors to profit from the the boom in agricultural stocks, business weekly newspaper Barron's said in its Feb. 7 edition.
Dupont, which recently made a $6.3 billion bid for Danish food producer Danisco (DCO.CO), would derive one-third of its revenue from seeds and other agricultural products if Danisco shareholders approve the deal, Barron's said.
The deal should start adding to Dupont's earnings next year and increase long-term profit growth by two percentage points to between 13 percent and 14 percent per year, Barron's said, citing a Soleil Securities analyst.
Dupont shares are cheaper on a price-expected earnings ratio basis than those of fertilizer maker Potash Corp of Saskatchewan (POT.TO) and biotech company Monsanto (MON.N), Barron's wrote. (Reporting by Phil Wahba, editing by Maureen Bavdek)
Dupont, which recently made a $6.3 billion bid for Danish food producer Danisco (DCO.CO), would derive one-third of its revenue from seeds and other agricultural products if Danisco shareholders approve the deal, Barron's said.
The deal should start adding to Dupont's earnings next year and increase long-term profit growth by two percentage points to between 13 percent and 14 percent per year, Barron's said, citing a Soleil Securities analyst.
Dupont shares are cheaper on a price-expected earnings ratio basis than those of fertilizer maker Potash Corp of Saskatchewan (POT.TO) and biotech company Monsanto (MON.N), Barron's wrote. (Reporting by Phil Wahba, editing by Maureen Bavdek)
Saturday, February 5, 2011
Modified Beet Gets New Life !!!
The Agriculture Department, trying to avoid a shortage of U.S. sugar, said Friday it would allow U.S. farmers to resume planting the widely used genetically modified version of the sugar-beet plant that a federal judge has effectively banned.
More than half of the nation's granulated sugar—the stuff that consumers buy in supermarkets for baking or to pour in coffee—has in recent years come from beet plants genetically modified in the same way as most of the corn, soybeans and cotton grown in the U.S. The other half comes from sugar cane.
The beets, which are grown extensively around the border between North Dakota and Minnesota, have a Monsanto Co. gene that gives them immunity to glyphosate-based weedkiller, which the St. Louis biotechnology company sells as Roundup herbicide.
U.S. District Judge Jeffrey S. White, who sits in San Francisco, last year blocked farmers from planting the weedkiller-resistant beets again this spring. He concluded the USDA should have conducted a lengthy study of the crop's potential consequences for groups such as organic farmers before originally clearing it in 2005.
An environmental-impact statement of the type ordered by the judge is usually thousands of pages long and takes years to conduct. That would have kept the genetically modified sugar beets out of the hands of farmers at least through 2012.
Monsanto said Friday that the USDA's move would allow U.S. farmers to begin planting genetically modified sugar beets this spring. But environmental and organic-seed groups that originally sued the USDA said Friday they would ask Judge White to block this latest move by the USDA.
Crop biotechnology and sugar interests had appealed to the USDA for some way to temporarily circumvent the judge's planting ban. According to biotechnology officials, that door opened when Monsanto successfully argued before the Supreme Court in 2010 that the USDA should be able to partially deregulate a genetically-modified crop while the agency completes environmental studies.
"Our clients would be irreparably harmed by the USDA's action," said Paul Achitoff, an attorney with Earthjustice, a nonprofit environmental-law firm, which is representing organic seed farms.
Sugar-beet processors say there aren't enough traditional seeds around for farmers to plant this spring. A study conducted for the sugar industry predicted that U.S. sugar production would plunge 20% if the judge's ban stays in place.
That prediction alarmed food companies because a big drop in the U.S. sugar-beet crop would raise their sugar costs, which already have climbed sharply in recent years, thanks partly to booming demand and partly to weather problems in some sugar-growing regions of the world. The price of sugar has nearly tripled over the past two years.
The USDA, in a move that seemingly expands its regulatory powers over crop biotechnology, will for the first time "partially deregulate" a genetically modified crop. USDA is permitting farmers to plant genetically modified sugar beets this year only if they adhere to rules designed to prevent the plant's wind-blown pollen from reaching organic fields, where its biotechnology traits could spread.
Organic-food makers typically reject any ingredients in which they detect genetically modified materials, costing the grower the big price premium usually commanded by organic crops.
Until now, the USDA has always allowed the unrestricted planting of a genetically modified crop once it had passed its regulatory review, a process that largely hinges on the narrow question of whether a genetically modified crop could somehow become a plant pest.
The USDA decision is the second big victory for the crop-biotechnology industry in a week. The Obama administration earlier decided to allow unrestricted planting of Roundup-resistant alfalfa after flirting for nearly a month with the idea of placating organic farmers by restricting the planting of that seed in some states.
In the case of sugar beets, crop biotechnology and sugar interests had appealed to the USDA for some way to temporarily circumvent the judge's planting ban. According to biotechnology officials, that door opened when Monsanto successfully argued before the Supreme Court in 2010 that the USDA should be able to partially deregulate a genetically modified crop while the agency completes environmental studies.
Under the USDA plan released Friday, the handful of farmer-owned cooperatives that process the vast majority of the nation's sugar beets would have to sign compliance agreements with the USDA, and provide extensive information about the location and movement of the crops.
The USDA is also banning the production of genetically modified sugar beets in some places where seeds for organic beets are produced, such as in California and parts of Washington state. In other places, the USDA won't allow genetically modified sugar beets to be grown within four miles of seed being raised for conventional versions of beet-like plants.
More than half of the nation's granulated sugar—the stuff that consumers buy in supermarkets for baking or to pour in coffee—has in recent years come from beet plants genetically modified in the same way as most of the corn, soybeans and cotton grown in the U.S. The other half comes from sugar cane.
The beets, which are grown extensively around the border between North Dakota and Minnesota, have a Monsanto Co. gene that gives them immunity to glyphosate-based weedkiller, which the St. Louis biotechnology company sells as Roundup herbicide.
U.S. District Judge Jeffrey S. White, who sits in San Francisco, last year blocked farmers from planting the weedkiller-resistant beets again this spring. He concluded the USDA should have conducted a lengthy study of the crop's potential consequences for groups such as organic farmers before originally clearing it in 2005.
An environmental-impact statement of the type ordered by the judge is usually thousands of pages long and takes years to conduct. That would have kept the genetically modified sugar beets out of the hands of farmers at least through 2012.
Monsanto said Friday that the USDA's move would allow U.S. farmers to begin planting genetically modified sugar beets this spring. But environmental and organic-seed groups that originally sued the USDA said Friday they would ask Judge White to block this latest move by the USDA.
Crop biotechnology and sugar interests had appealed to the USDA for some way to temporarily circumvent the judge's planting ban. According to biotechnology officials, that door opened when Monsanto successfully argued before the Supreme Court in 2010 that the USDA should be able to partially deregulate a genetically-modified crop while the agency completes environmental studies.
"Our clients would be irreparably harmed by the USDA's action," said Paul Achitoff, an attorney with Earthjustice, a nonprofit environmental-law firm, which is representing organic seed farms.
Sugar-beet processors say there aren't enough traditional seeds around for farmers to plant this spring. A study conducted for the sugar industry predicted that U.S. sugar production would plunge 20% if the judge's ban stays in place.
That prediction alarmed food companies because a big drop in the U.S. sugar-beet crop would raise their sugar costs, which already have climbed sharply in recent years, thanks partly to booming demand and partly to weather problems in some sugar-growing regions of the world. The price of sugar has nearly tripled over the past two years.
The USDA, in a move that seemingly expands its regulatory powers over crop biotechnology, will for the first time "partially deregulate" a genetically modified crop. USDA is permitting farmers to plant genetically modified sugar beets this year only if they adhere to rules designed to prevent the plant's wind-blown pollen from reaching organic fields, where its biotechnology traits could spread.
Organic-food makers typically reject any ingredients in which they detect genetically modified materials, costing the grower the big price premium usually commanded by organic crops.
Until now, the USDA has always allowed the unrestricted planting of a genetically modified crop once it had passed its regulatory review, a process that largely hinges on the narrow question of whether a genetically modified crop could somehow become a plant pest.
The USDA decision is the second big victory for the crop-biotechnology industry in a week. The Obama administration earlier decided to allow unrestricted planting of Roundup-resistant alfalfa after flirting for nearly a month with the idea of placating organic farmers by restricting the planting of that seed in some states.
In the case of sugar beets, crop biotechnology and sugar interests had appealed to the USDA for some way to temporarily circumvent the judge's planting ban. According to biotechnology officials, that door opened when Monsanto successfully argued before the Supreme Court in 2010 that the USDA should be able to partially deregulate a genetically modified crop while the agency completes environmental studies.
Under the USDA plan released Friday, the handful of farmer-owned cooperatives that process the vast majority of the nation's sugar beets would have to sign compliance agreements with the USDA, and provide extensive information about the location and movement of the crops.
The USDA is also banning the production of genetically modified sugar beets in some places where seeds for organic beets are produced, such as in California and parts of Washington state. In other places, the USDA won't allow genetically modified sugar beets to be grown within four miles of seed being raised for conventional versions of beet-like plants.
Friday, February 4, 2011
Navellier's Top 3 Agricultural stocks
Deere(DE) is the world's largest farm equipment manufacturer and a leading producer of construction, forestry and commercial and residential lawn care equipment. Unlike in Eastern Europe, where wheat production has slowed, U.S. crops have surged in the past several months. Currently, the country is producing a record number of crop exports. The higher demand for crops is leading to a greater need for farm equipment.
Although agriculture only accounts for about 1% of the U.S. economy, the actual impact of surging prices could be 10 times greater once spending on equipment, seeds, grain handling and food processing is calculated. This is why Deere stands to capitalize on high agricultural commodity prices. I see this as a great way to play the overall trend in higher food prices that is developing, along with the decline in the U.S. dollar.
Agrium(AGU) is a major producer and marketer of fertilizers in North America. The company operates plants in Argentina, Canada and the United States that produce mostly nitrogen, as well as potash and phosphate products. These plants have the capacity to produce more than 8 million tons of the nutrients per year. In addition to supplying wholesalers, Agrium operates more than 826 retail outlets in the United States and South America. The company has had trouble in recent quarters living up to analyst expectations, so if the company meets or beats in its next report this could be a runaway winner.
CF Industries (CF) is a regional agricultural firm that manufactures and markets nitrogenous and phosphate fertilizers. The company operates a network of manufacturing and distribution facilities, primarily in the Midwest. It's a no-brainer when it comes to understanding why fertilizer companies are doing so well right now. CF is a go-to company when farmers need to boost crop yields to meet the global demand for food.
CF has had some of the same issues as AGU when it comes to earnings, but the company has seen improving fundamentals over the past six months, and looks like shares will continue their march higher in the coming months.
Although agriculture only accounts for about 1% of the U.S. economy, the actual impact of surging prices could be 10 times greater once spending on equipment, seeds, grain handling and food processing is calculated. This is why Deere stands to capitalize on high agricultural commodity prices. I see this as a great way to play the overall trend in higher food prices that is developing, along with the decline in the U.S. dollar.
Agrium(AGU) is a major producer and marketer of fertilizers in North America. The company operates plants in Argentina, Canada and the United States that produce mostly nitrogen, as well as potash and phosphate products. These plants have the capacity to produce more than 8 million tons of the nutrients per year. In addition to supplying wholesalers, Agrium operates more than 826 retail outlets in the United States and South America. The company has had trouble in recent quarters living up to analyst expectations, so if the company meets or beats in its next report this could be a runaway winner.
CF Industries (CF) is a regional agricultural firm that manufactures and markets nitrogenous and phosphate fertilizers. The company operates a network of manufacturing and distribution facilities, primarily in the Midwest. It's a no-brainer when it comes to understanding why fertilizer companies are doing so well right now. CF is a go-to company when farmers need to boost crop yields to meet the global demand for food.
CF has had some of the same issues as AGU when it comes to earnings, but the company has seen improving fundamentals over the past six months, and looks like shares will continue their march higher in the coming months.
Top 3 Agricultural Stocks to watch in 2011
The Mosaic Company (NYSE: MOS) is a Plymouth, Minnesota-based producer and marketer of concentrated phosphate and potash crop nutrients for the worldwide agriculture industry.
Mosaic will announce its second-quarter financial results next week. For the first quarter, the company posted total phosphate sales volumes of 3.1 million tons, and total potash sales volumes of 1.7 million tons. The company’s gross margin was 23% in the first quarter. It posted a net income of $297.7 million, or $0.67 per share.
For the second quarter, the company expects total phosphate sales volumes to come in between 3.3 million and 3.6 million tones and total potash sales volumes to come in between 1.6 million and 1.9 million tons.
The Mosaic stock has a 52-week range of $37.68-$74.25. Year-to-date, the stock is up 18.95%.
The Dow Chemical Company (NYSE: DOW) is a Midland, Michigan-based company engaged in the manufacture and sales of chemicals, plastic materials, agricultural and services, and other specialized products and services.
Earlier this month, Dow announced that it plans to build a new Propylene Glycol Plant in Thailand. The company said that it plans to build a plant with production capacity of up to 150 KTA.
Earlier this month, Dow also declared a quarterly dividend of $0.15 per share. The dividend will be payable on January 28, 2011, to shareholders of record on December 31, 2010.
The Dow Chemical stock has a 52-week range of $22.42-$34.50. Year-to-date, the stock is up 23.34%.
Agrium Inc. (NYSE: AGU) is a Calgary, Canada-based retailer of agricultural products and services in the U.S., Argentina, Chile and Uruguay. The company is also engaged in the worldwide production and wholesale marketing of nutrients for agricultural and industrial markets.
Earlier this month, Agrium announced that it successfully completed its acquisition of AWB Limited at a price of $1.50 per share in cash.
The Agrium stock has a 52-week range of $47.96-$89.69. Year-to-date, the stock is up 39.27%.
Mosaic will announce its second-quarter financial results next week. For the first quarter, the company posted total phosphate sales volumes of 3.1 million tons, and total potash sales volumes of 1.7 million tons. The company’s gross margin was 23% in the first quarter. It posted a net income of $297.7 million, or $0.67 per share.
For the second quarter, the company expects total phosphate sales volumes to come in between 3.3 million and 3.6 million tones and total potash sales volumes to come in between 1.6 million and 1.9 million tons.
The Mosaic stock has a 52-week range of $37.68-$74.25. Year-to-date, the stock is up 18.95%.
The Dow Chemical Company (NYSE: DOW) is a Midland, Michigan-based company engaged in the manufacture and sales of chemicals, plastic materials, agricultural and services, and other specialized products and services.
Earlier this month, Dow announced that it plans to build a new Propylene Glycol Plant in Thailand. The company said that it plans to build a plant with production capacity of up to 150 KTA.
Earlier this month, Dow also declared a quarterly dividend of $0.15 per share. The dividend will be payable on January 28, 2011, to shareholders of record on December 31, 2010.
The Dow Chemical stock has a 52-week range of $22.42-$34.50. Year-to-date, the stock is up 23.34%.
Agrium Inc. (NYSE: AGU) is a Calgary, Canada-based retailer of agricultural products and services in the U.S., Argentina, Chile and Uruguay. The company is also engaged in the worldwide production and wholesale marketing of nutrients for agricultural and industrial markets.
Earlier this month, Agrium announced that it successfully completed its acquisition of AWB Limited at a price of $1.50 per share in cash.
The Agrium stock has a 52-week range of $47.96-$89.69. Year-to-date, the stock is up 39.27%.
CARBO Ceramics Inc. (CRR): Zacks Rank Buy
CARBO Ceramics Inc. (NYSE: CRR - News) remains one hot company as it wrapped up the best year in the company's history in 2010. This Zacks #1 Rank (strong buy) recently surprised on the Zacks Consensus Estimate for the 4th quarter in a row which sent shares soaring to new highs.
CARBO is the world's largest supplier of ceramic proppant for fracturing oil and gas wells. With natural gas prices in the dumps, its customers have been moving towards oily, liquid-rich plays especially in the major shale areas in North America.
Revenue Jumped 33% in the Fourth Quarter
On Jan 27, CARBO reported its fourth quarter results and blew by the Zacks Consensus Estimate by 17%. Earnings per share were 91 cents compared to the consensus of 78 cents.
Revenue climbed $29.5 million to $119.6 million. Proppant sales volume rose 20% to 332 million pounds. Breaking it down by geographic segment, proppant sales volume rose 17% in North America (excluding Mexico) and 37% in the international segment compared to the fourth quarter of 2009.
'Exiting the third quarter, we witnessed continued momentum in proppant sales,' said President and CEO Gary Kolstad.
'The up tick in horizontal fracturing in oil bearing reservoirs, coupled with our traditionally strong footprint in gas driven plays, caused sales volume resilience in a quarter that historically shows seasonal weakness,' he added.
The company started operations on the third 250 pound production line at the Toomsboro, Georgia facility. It will be completing that line and completing the fourth line by the end of 2011.
The Outlook for 2011 Looks Bright
The company is bullish about 2011 as industry activity levels remain high even though natural gas prices are low. CARBO continues to see a shift in activity to oily, liquid-rich plays which is where its proppant comes into play.
It is ramping up production at several of its facilities. CARBO started site preparation for a second resin coating line at its New Iberia facility which will increase resin coating capacity to 400 million pounds annually from the current capacity of 100 million.
Zacks Consensus Estimates Move Higher
Not surprisingly given the solid quarter, Zacks Consensus Estimates have moved sharply higher since the earnings announcement.
The 2011 Zacks Consensus Estimate jumped 14 cents to $4.20 per share. That is earnings growth of 22.5% compared to 2010, which was already a record year.
The party is expected to continue into 2012 with the Zacks Consensus rising to $5.33 from $4.96 in the last week, as 4 estimates moved higher and 1 lower in that time.
That is another 27% earnings growth.
Valuations In Line With Peers
CARBO is not a cheap stock. It is trading at 27x forward estimates which is much more expensive than the S&P 500 at 14x.
However, its peers are also trading at 27x so it is in line with their valuations.
Shares At 10-Year Highs
Shares have been in a strong rally for the last 2 years and the recent earnings results have pushed shares to yet another 10 year high.
This Week's Momentum Zacks Rank Buy Stocks
CF Industries Holdings, Inc. (NYSE: CF - News) continues to trade strong, recently hitting a new multi-year high at $149.65 as agriculture prices remain in elevated territory. With a bullish growth projection and discounted valuation, this Zacks #1 rank stock is a solid momentum player. Read the full article.
Holly Corporation (NYSE: HOC - News) jumped to a Zacks #1 Rank (Strong Buy) thanks to an influx of upward estimate revisions. The outlook for HOC has been steadily improving, as has the share price. Read the full article.
With millions of smartphones and tablets expected to be sold in 2011, wireless technology is hot. InterDigital, Inc. (NasdaqGS: IDCC - News) expects to report a strong fourth quarter on Feb 23. Shares of this Zacks #1 Rank (strong buy) have soared in the last 6 months. Read the full article.
CARBO is the world's largest supplier of ceramic proppant for fracturing oil and gas wells. With natural gas prices in the dumps, its customers have been moving towards oily, liquid-rich plays especially in the major shale areas in North America.
Revenue Jumped 33% in the Fourth Quarter
On Jan 27, CARBO reported its fourth quarter results and blew by the Zacks Consensus Estimate by 17%. Earnings per share were 91 cents compared to the consensus of 78 cents.
Revenue climbed $29.5 million to $119.6 million. Proppant sales volume rose 20% to 332 million pounds. Breaking it down by geographic segment, proppant sales volume rose 17% in North America (excluding Mexico) and 37% in the international segment compared to the fourth quarter of 2009.
'Exiting the third quarter, we witnessed continued momentum in proppant sales,' said President and CEO Gary Kolstad.
'The up tick in horizontal fracturing in oil bearing reservoirs, coupled with our traditionally strong footprint in gas driven plays, caused sales volume resilience in a quarter that historically shows seasonal weakness,' he added.
The company started operations on the third 250 pound production line at the Toomsboro, Georgia facility. It will be completing that line and completing the fourth line by the end of 2011.
The Outlook for 2011 Looks Bright
The company is bullish about 2011 as industry activity levels remain high even though natural gas prices are low. CARBO continues to see a shift in activity to oily, liquid-rich plays which is where its proppant comes into play.
It is ramping up production at several of its facilities. CARBO started site preparation for a second resin coating line at its New Iberia facility which will increase resin coating capacity to 400 million pounds annually from the current capacity of 100 million.
Zacks Consensus Estimates Move Higher
Not surprisingly given the solid quarter, Zacks Consensus Estimates have moved sharply higher since the earnings announcement.
The 2011 Zacks Consensus Estimate jumped 14 cents to $4.20 per share. That is earnings growth of 22.5% compared to 2010, which was already a record year.
The party is expected to continue into 2012 with the Zacks Consensus rising to $5.33 from $4.96 in the last week, as 4 estimates moved higher and 1 lower in that time.
That is another 27% earnings growth.
Valuations In Line With Peers
CARBO is not a cheap stock. It is trading at 27x forward estimates which is much more expensive than the S&P 500 at 14x.
However, its peers are also trading at 27x so it is in line with their valuations.
Shares At 10-Year Highs
Shares have been in a strong rally for the last 2 years and the recent earnings results have pushed shares to yet another 10 year high.
This Week's Momentum Zacks Rank Buy Stocks
CF Industries Holdings, Inc. (NYSE: CF - News) continues to trade strong, recently hitting a new multi-year high at $149.65 as agriculture prices remain in elevated territory. With a bullish growth projection and discounted valuation, this Zacks #1 rank stock is a solid momentum player. Read the full article.
Holly Corporation (NYSE: HOC - News) jumped to a Zacks #1 Rank (Strong Buy) thanks to an influx of upward estimate revisions. The outlook for HOC has been steadily improving, as has the share price. Read the full article.
With millions of smartphones and tablets expected to be sold in 2011, wireless technology is hot. InterDigital, Inc. (NasdaqGS: IDCC - News) expects to report a strong fourth quarter on Feb 23. Shares of this Zacks #1 Rank (strong buy) have soared in the last 6 months. Read the full article.
Caterpillar Has Stellar 2010
Caterpillar Inc. (NYSE: CAT - News) ended fiscal 2010 on a promising note coming off a very challenging 2009. The company’s fourth quarter adjusted EPS increased almost four fold to $1.47 and fiscal 2010 adjusted EPS almost doubled to $4.15 from the prior-year comparable periods.
The upbeat results were augured by ever-increasing demand for mining and construction equipment that drove sales.
Both the fourth quarter and fiscal year EPS outperformed the respective Zacks Consensus Estimates of $1.27 and $4.01. Caterpillar also whizzed past its guided range of $3.80 to $4.00 for fiscal 2010.
The adjusted EPS for both the prior-year comparable periods excluded redundancy costs. Including redundancy costs, fourth quarter fiscal 2010 EPS was quadrupled from 36 cents reported in the year-ago quarter while fiscal 2010 EPS was almost three times the $1.43 reported in the prior year.
Revenues in the quarter were $12.8 billion, a 62% jump from $7.9 billion in the year-ago period and well above the Zacks Consensus Estimate of $11.4 billion. Region wise, North America led the pack with a growth of 78%, followed by Latin America, Asia-Pacific and EAME markets posting impressive growth rates of 59%, 55% and 49%, respectively.
For fiscal 2010, revenues upped 31% year over year to $42.6 billion, outperforming the Zacks Consensus Estimate of $40 billion by a good margin. The reported revenue was also higher than the company’s guided revenue range of $41 million to $42 billion.
For the full year, Latin America led the results with a 58% climb, followed by Asia Pacific, North America, and EAME markets increasing 43%, 30% and 13%, respectively.
Cost of goods sold increased 60% year over year to $9.3 billion in the quarter but, as a percentage of revenue, declined 110 basis points to 73%. Selling, general and administrative (SG&A) expenses increased 18% to $1,109 million in the quarter and, as a percentage of revenues, improved 320 basis points to 8.7%.
Consequently, gross margin increased 110 basis points to 27% and operating margin expanded 850 basis points to 10.1% in the quarter.
Segment Performance
Machinery sales surged 88% to $8.6 billion in the quarter due to higher end-user demand and the absence of dealer inventory reductions seen in 2009. The segment posted an operating profit of $705 million in stark contrast to a loss of $123 million in the year-ago quarter.
Higher sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A, research and development (R&D) expenses and manufacturing costs.
Engines sales increased 36% to $3.57 billion primarily driven by higher sales of engines for electric power, petroleum and industrial applications. Increased price realization was offset by a negative currency translation impact. The segment’s operating profit increased a whopping 123% year over year to $539 million.
Increased sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A and R&D expenses.
Financial Products revenues dipped 6% to $666 million due to lower average earning assets. The segment’s operating profit went up 62% to $102 million.
The increase was driven by a $26 million decrease in the provision for credit losses at Cat Financial, a $23 million favorable change from returned or repossessed equipment and a $13 million favorable impact due to lower claims experienced at Cat Insurance, partially offset by a $14 million unfavorable impact from lower average earning assets and $11 million due to incentive pay.
Financial Position
Caterpillar had cash and cash equivalents of $3.59 billion on the balance sheet as of December 31, 2010, up from $2.3 billion as of September 30, 2010. The company generated net cash from operating activities of $5 billion from operating activities in fiscal 2010 compared with $6.5 billion in the prior year.
Machinery and Engines’ debt-to-capital ratio improved to 34.8% as of December 31, 2010compared with 39.1% as of September 30, 2010 and 47.2% as of December 31, 2009.
Looking to 2011
Caterpillar expects its sales to cross the $50 billion mark in fiscal 2011. This translates into a 17% year-over-year growth from sales of $42.6 billion recorded in fiscal 2010. Developing countries are expected to maintain their growth trajectory along with improving economies in North America and Europe.
Strong demand for mining products and the need for dealers to add to inventories and replenish rental fleet are expected to be accretive to 2011 sales. The company however admitted that these increases might be marred by small declines in later cycle industries, such as turbines and marine engines.
The company expects the world economy to grow more than 3.5% in 2010 driven by a growth of 6.5% from developing economies. The Asia-Pacific economy should grow 7.5% in 2011. Caterpillar forecasts a growth of 4.5% in Latin America and more than 5% growth in Africa/Middle East, and the CIS in 2011. The U.S economy is expected to grow about 3.5% in 2011 and Europe to post a 2% growth.
Earnings per share are expected to be near $6.00, suggesting 45% year-over-year growth from the 2010 figure of $4.15. The EPS growth is expected to be driven by higher sales volume, improvement in price realization, comparatively flat material costs, somewhat offset by unfavorable product mix, higher manufacturing costs, SG&A and R&D expense, higher taxes and bridge financing costs associated with the Bucyrus acquisition.
If Caterpillar accomplishes this lofty target, 2011 will be a milestone year for the company with the highest EPS in its history, topping the prior record of $5.66 set in 2008.
During the year, Caterpillar made a number of announcements to enhance its capacity for key products like mining trucks and excavators, which include three new facilities in the United States and significantly five outside the United States. Caterpillar plans to expend about $3 billion in capital expenditures, with more than half earmarked to be spent in the United States.
During 2010 Caterpillar announced three significant acquisitions — Electro-Motive Diesel Inc, Motoren-Werke Mannheim Holding GmbH and Bucyrus International Inc. (NasdaqGS: BUCY - News). The 2011 guidance includes the impact of the Electro-Motive Diesel Inc. deal but excludes the acquisitions of the other two as these are yet to close.
Our Take
Caterpillar’s strong brand name, pricing power and global dealer network put it in a vantage position to capitalize on the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in emerging markets, will boost its long-term potential. Furthermore, its biggest acquisition to date, Bucyrus, will not only enhance its product line and increase its presence in the emerging markets, but also strengthen its position as the #1 mining equipment manufacturer in the U.S.
We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. The company operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with CNH Global NV (NYSE: CNH - News), Komatsu Ltd. (Other OTC: KMTUF.PK - News) and Volvo AB (Other OTC: VOLVY.PK - News) but is way ahead of its peers.
The upbeat results were augured by ever-increasing demand for mining and construction equipment that drove sales.
Both the fourth quarter and fiscal year EPS outperformed the respective Zacks Consensus Estimates of $1.27 and $4.01. Caterpillar also whizzed past its guided range of $3.80 to $4.00 for fiscal 2010.
The adjusted EPS for both the prior-year comparable periods excluded redundancy costs. Including redundancy costs, fourth quarter fiscal 2010 EPS was quadrupled from 36 cents reported in the year-ago quarter while fiscal 2010 EPS was almost three times the $1.43 reported in the prior year.
Revenues in the quarter were $12.8 billion, a 62% jump from $7.9 billion in the year-ago period and well above the Zacks Consensus Estimate of $11.4 billion. Region wise, North America led the pack with a growth of 78%, followed by Latin America, Asia-Pacific and EAME markets posting impressive growth rates of 59%, 55% and 49%, respectively.
For fiscal 2010, revenues upped 31% year over year to $42.6 billion, outperforming the Zacks Consensus Estimate of $40 billion by a good margin. The reported revenue was also higher than the company’s guided revenue range of $41 million to $42 billion.
For the full year, Latin America led the results with a 58% climb, followed by Asia Pacific, North America, and EAME markets increasing 43%, 30% and 13%, respectively.
Cost of goods sold increased 60% year over year to $9.3 billion in the quarter but, as a percentage of revenue, declined 110 basis points to 73%. Selling, general and administrative (SG&A) expenses increased 18% to $1,109 million in the quarter and, as a percentage of revenues, improved 320 basis points to 8.7%.
Consequently, gross margin increased 110 basis points to 27% and operating margin expanded 850 basis points to 10.1% in the quarter.
Segment Performance
Machinery sales surged 88% to $8.6 billion in the quarter due to higher end-user demand and the absence of dealer inventory reductions seen in 2009. The segment posted an operating profit of $705 million in stark contrast to a loss of $123 million in the year-ago quarter.
Higher sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A, research and development (R&D) expenses and manufacturing costs.
Engines sales increased 36% to $3.57 billion primarily driven by higher sales of engines for electric power, petroleum and industrial applications. Increased price realization was offset by a negative currency translation impact. The segment’s operating profit increased a whopping 123% year over year to $539 million.
Increased sales volume, which included the impact of an unfavorable mix of products, and improved price realization were partially offset by higher SG&A and R&D expenses.
Financial Products revenues dipped 6% to $666 million due to lower average earning assets. The segment’s operating profit went up 62% to $102 million.
The increase was driven by a $26 million decrease in the provision for credit losses at Cat Financial, a $23 million favorable change from returned or repossessed equipment and a $13 million favorable impact due to lower claims experienced at Cat Insurance, partially offset by a $14 million unfavorable impact from lower average earning assets and $11 million due to incentive pay.
Financial Position
Caterpillar had cash and cash equivalents of $3.59 billion on the balance sheet as of December 31, 2010, up from $2.3 billion as of September 30, 2010. The company generated net cash from operating activities of $5 billion from operating activities in fiscal 2010 compared with $6.5 billion in the prior year.
Machinery and Engines’ debt-to-capital ratio improved to 34.8% as of December 31, 2010compared with 39.1% as of September 30, 2010 and 47.2% as of December 31, 2009.
Looking to 2011
Caterpillar expects its sales to cross the $50 billion mark in fiscal 2011. This translates into a 17% year-over-year growth from sales of $42.6 billion recorded in fiscal 2010. Developing countries are expected to maintain their growth trajectory along with improving economies in North America and Europe.
Strong demand for mining products and the need for dealers to add to inventories and replenish rental fleet are expected to be accretive to 2011 sales. The company however admitted that these increases might be marred by small declines in later cycle industries, such as turbines and marine engines.
The company expects the world economy to grow more than 3.5% in 2010 driven by a growth of 6.5% from developing economies. The Asia-Pacific economy should grow 7.5% in 2011. Caterpillar forecasts a growth of 4.5% in Latin America and more than 5% growth in Africa/Middle East, and the CIS in 2011. The U.S economy is expected to grow about 3.5% in 2011 and Europe to post a 2% growth.
Earnings per share are expected to be near $6.00, suggesting 45% year-over-year growth from the 2010 figure of $4.15. The EPS growth is expected to be driven by higher sales volume, improvement in price realization, comparatively flat material costs, somewhat offset by unfavorable product mix, higher manufacturing costs, SG&A and R&D expense, higher taxes and bridge financing costs associated with the Bucyrus acquisition.
If Caterpillar accomplishes this lofty target, 2011 will be a milestone year for the company with the highest EPS in its history, topping the prior record of $5.66 set in 2008.
During the year, Caterpillar made a number of announcements to enhance its capacity for key products like mining trucks and excavators, which include three new facilities in the United States and significantly five outside the United States. Caterpillar plans to expend about $3 billion in capital expenditures, with more than half earmarked to be spent in the United States.
During 2010 Caterpillar announced three significant acquisitions — Electro-Motive Diesel Inc, Motoren-Werke Mannheim Holding GmbH and Bucyrus International Inc. (NasdaqGS: BUCY - News). The 2011 guidance includes the impact of the Electro-Motive Diesel Inc. deal but excludes the acquisitions of the other two as these are yet to close.
Our Take
Caterpillar’s strong brand name, pricing power and global dealer network put it in a vantage position to capitalize on the growing need for infrastructure development worldwide. We believe Caterpillar’s expansion plans of opening new facilities and furthering existing operations, particularly in emerging markets, will boost its long-term potential. Furthermore, its biggest acquisition to date, Bucyrus, will not only enhance its product line and increase its presence in the emerging markets, but also strengthen its position as the #1 mining equipment manufacturer in the U.S.
We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.
Peoria, Illinois-based Caterpillar Inc. is the manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is one of the few leading U.S. companies in an industry that competes globally from a principally domestic manufacturing base. The company operates three divisions – Machines, Engines and Financial Products. Caterpillar competes with CNH Global NV (NYSE: CNH - News), Komatsu Ltd. (Other OTC: KMTUF.PK - News) and Volvo AB (Other OTC: VOLVY.PK - News) but is way ahead of its peers.
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