By the time you read this, the crop report will be old news. We don't expect any big surprises, nor does The Street. The expectation is that corn plantings will be down, soybean plantings will be up, and cotton will probably get the weakest planting of all.
One of the more interesting plays on these kinds of numbers has been potash. Potash, which you can get from burning wood - but is more often mined - is a critical fertilizer. The three biggest demand sources are Corn, Soybeans and Cotton, in that order. So the algebra for the big potash companies is what the shifts will be.
Cotton, Corn and Soybeans can be interchangeable on the same acreage. So less cotton and more anything else is a plus, but less corn is a minus. It's safe to assume that the market has priced in the median assumptions, and that all today brings is volatility.
The "pricing in" in this case, is in the three big public potash plays: Potash Corporation of Saskatchewan (NYSE: POT), The Mosaic Company (NYSE: MOS), and Agrium Incorporated (NYSE: AGU). While all three have businesses other than potash, they are, in descending order, the big fish - with POT alone controlling 75% of the surplus Potash available on the spot market.
The three companies share a common exporter, Canoptex, jointly owned and focused on sales in Asia. While 60% of Canoptex's potash ends up sold on the spot market, the remainder is sold in long-term negotiated contracts, much like iron ore. As a joint marketer, it has tremendous pricing power and enters into long-term contracts with international firms - in other words, China. China and India have become tremendous sources of demand for bulk potash, and the bottom line is there aren't that many places for them to get it. Canada and Russia are pretty much it.
This year's big contracts with China and India from Russia were just struck, at a time when the spot prices are twice what they were last year ($625 per ton). This left the market salivating at the prospects of the big North American firms' prospects for high-margin, peak-priced contracts, saliva so far well justified as Mosaic announced a deal to supply India at the same prices on Friday. None of this is news to potash-supplier shareholders of course, and the result is fertilizer companies with P/E ratios that put Apple and Microsoft to shame (but which are increasingly common in hot commodities stocks)
And this also comes at the end of a phenomenal bull run for the companies concerned
One-year numbers like that make the commodities boom seem boring by comparison. But look at the volatility. These are heavily played stocks, subject to wild swings (as Brad recently pointed out). Analysts have been jumping on the buy wagon, earnings estimates keep getting revised up, and the China card is being played more and more heavily in every article. In a world where pure-plays in commodities are increasingly difficult to find, POT and MOS have represented rare speculative gems. Good for long-term holders, dangerous for newcomers.
The next four weeks are critical if you're playing the home game. Mosaic releases earnings on April 4, with Potash following shortly thereafter on April 24. This is a classic case where a micro-sector has gotten hot in a hurry, and the fever is about to peak. This doesn't necessarily mean anything is going up - new investors may indeed pile in as Jim "Bear Stearns is Fine" Cramer whips them into a frenzy over POT, but then, a lot of smart money was in these stocks last March and may be looking for the exit signs on bigger news-driven pops.
What it does mean is volatility. MOS's one-year volatility is already over 67% (vs. 25% for, say, the Goldman Sachs Commodity Index). The ride's only going to get wilder.
Wednesday, April 2, 2008
IBD's Top 10 - Wednesday
Monsanto Tops, Falls On Outlook
The seed and herbicide giant said Q2 EPS rose 83% to $1.79 ex items, beating views by 7 cents. Sales grew 45% to $3.78 bil, above forecasts and the best growth in years. Monsanto (NYSE:MON - News) stuck to last week's raised '08 EPS outlook, which seemed to disappoint investors. Its shares fell 1%, though they closed near the day's high.
The seed and herbicide giant said Q2 EPS rose 83% to $1.79 ex items, beating views by 7 cents. Sales grew 45% to $3.78 bil, above forecasts and the best growth in years. Monsanto (NYSE:MON - News) stuck to last week's raised '08 EPS outlook, which seemed to disappoint investors. Its shares fell 1%, though they closed near the day's high.
Monsanto Rides Corn Boom, But Outlook Disappoints
Worries about this year's corn planting pushed down Monsanto (NYSE:MON - News) on Wednesday, despite strong second-quarter results.
Shares of the St. Louis-based seed and herbicide giant fell as low as 105.84, before rallying to finish down 1% at 112.
Monsanto stuck to its full-year profit forecast of $3.15-$3.25 a share, after raising the range from $2.70-$2.80 on March 25.
Wall Street expected $3.20, though investors and some analysts had hoped for more.
Second-quarter profit rose 83% to $1.79 a share excluding items, 7 cents above analyst views. But the results were a big surprise after last week's announcement.
Sales rose 45% to $3.78 billion, the best growth in several years.
Monsanto said U.S. and Brazilian corn-seed sales were particularly strong.
Sales of Roundup and other herbicides jumped 85% to $982 million.
Monsanto and other agriculture stocks also continue to react to Monday's Agriculture Department forecast, which projected an 8% drop in U.S. corn acreage next year. On the other hand, the USDA expects farmers to plant 18% more soybean acres.
Monsanto sells both corn and soybean seeds, though it typically sees higher margins from corn.
The company remains bullish in the long term. Its five-year plan calls for doubling operating profit, largely from new strains and genetically engineered corn, while gaining global market share.
In a statement, CEO Hugh Grant said that between now and 2012, Monsanto is the only agriculture company "that can point 15 consistent growth irrespective of the commodity price swings, fluctuations in planted acres or the popularity of ethanol."
Analysts also aren't worried about short-term planting cycles.
"We still think commodity prices are going to be higher than average," said Argus Research analyst Bill Selesky. "And we don't think that's going to slow down soon."
Food prices have soared to record highs on strong global demand. As Chinese and other people around the world get wealthier, they are eating more meat. It takes more grain to produce beef or pork than to feed a family.
The U.S. is subsidizing corn-based ethanol production. Global stockpiles are near longtime lows.
All those factors should spur further demand for Monsanto seeds that boost yields, resist pests or boast other desirable traits.
"Their technologies make farmers more money. It's more efficient for them to use," said UBS analyst Chris Shaw.
Shaw says the company has a strong research and development pipeline.
"The long-term story is that Monsanto doesn't depend on shorter-term shifts on acres and commodity prices," he said.
Separately, Monsanto said it would spend $196 million over the next 18 months to expand its Luling, La., plant, which makes Roundup and other glyphosate-based herbicides.
Shares of chemical fertilizer firms were mixed.
Fertilizer maker Mosaic (NYSE:MOS - News) sold off initially but, like Monsanto, closed down just 1%. Potash Corp. of Saskatchewan (NYSE:POT - News) rallied to close up 1%. Dow Chemical (NYSE:DOW - News) also rose 1%, while DuPont (NYSE:DD - News) climbed 2%.
Shares of the St. Louis-based seed and herbicide giant fell as low as 105.84, before rallying to finish down 1% at 112.
Monsanto stuck to its full-year profit forecast of $3.15-$3.25 a share, after raising the range from $2.70-$2.80 on March 25.
Wall Street expected $3.20, though investors and some analysts had hoped for more.
Second-quarter profit rose 83% to $1.79 a share excluding items, 7 cents above analyst views. But the results were a big surprise after last week's announcement.
Sales rose 45% to $3.78 billion, the best growth in several years.
Monsanto said U.S. and Brazilian corn-seed sales were particularly strong.
Sales of Roundup and other herbicides jumped 85% to $982 million.
Monsanto and other agriculture stocks also continue to react to Monday's Agriculture Department forecast, which projected an 8% drop in U.S. corn acreage next year. On the other hand, the USDA expects farmers to plant 18% more soybean acres.
Monsanto sells both corn and soybean seeds, though it typically sees higher margins from corn.
The company remains bullish in the long term. Its five-year plan calls for doubling operating profit, largely from new strains and genetically engineered corn, while gaining global market share.
In a statement, CEO Hugh Grant said that between now and 2012, Monsanto is the only agriculture company "that can point 15 consistent growth irrespective of the commodity price swings, fluctuations in planted acres or the popularity of ethanol."
Analysts also aren't worried about short-term planting cycles.
"We still think commodity prices are going to be higher than average," said Argus Research analyst Bill Selesky. "And we don't think that's going to slow down soon."
Food prices have soared to record highs on strong global demand. As Chinese and other people around the world get wealthier, they are eating more meat. It takes more grain to produce beef or pork than to feed a family.
The U.S. is subsidizing corn-based ethanol production. Global stockpiles are near longtime lows.
All those factors should spur further demand for Monsanto seeds that boost yields, resist pests or boast other desirable traits.
"Their technologies make farmers more money. It's more efficient for them to use," said UBS analyst Chris Shaw.
Shaw says the company has a strong research and development pipeline.
"The long-term story is that Monsanto doesn't depend on shorter-term shifts on acres and commodity prices," he said.
Separately, Monsanto said it would spend $196 million over the next 18 months to expand its Luling, La., plant, which makes Roundup and other glyphosate-based herbicides.
Shares of chemical fertilizer firms were mixed.
Fertilizer maker Mosaic (NYSE:MOS - News) sold off initially but, like Monsanto, closed down just 1%. Potash Corp. of Saskatchewan (NYSE:POT - News) rallied to close up 1%. Dow Chemical (NYSE:DOW - News) also rose 1%, while DuPont (NYSE:DD - News) climbed 2%.
The Short Case for Origin Agritech
Investors want to hear the good news. What's going to propel their stocks forward? What are the growth drivers for revenues and earnings? What is a company's competitive moat? Gainsay a company, and you're labeled a short seller. Point out flaws, and you're ridiculed as part of a mob driving shares lower. Many investors simply don't want to hear or can't handle the ugly truth about the companies they own.
That's not me. I want to know what can go wrong with my stocks. If my money's on the line, I don't want to be blindsided. That's why one of the first parts I read in a company's annual report is the section on risks. It's the dumping grounds for companies to lay out all the things that could go wrong with their business. In essence, I want to know the short case for my stock.
The germ of an idea
Origin Agritech (Nasdaq: SEED) has planted the seeds of a high-growth business. It develops corn, rice, cotton, and canola seeds for sale in China and operates in a field where foreign competitors such as Monsanto (NYSE: MON) are severely restricted or prohibited. With products that meet a burgeoning Chinese market need and a government license to be the sole manufacturer of a new genetically modified (GM) corn seed, Origin Agritech would seem poised for a bountiful harvest. So what might cause a blight on this investment?
Lend me your ears -- of corn
Origin's GM phytase corn is expected to be one of the first transgenic corn products approved and sold in China. The enzyme phytase is present in the digestive systems of many plant-eating animals and enables them to breakdown phytic acid. By genetically modifying the corn, Origin Agritech hopes to reduce the need for inorganic phosphate supplements to be added to the feed, thereby reducing phosphate pollution, which can lead to algae bloom and freshwater contamination -- potentially serious environmental hazards.
Yet critics derisively refer to GM foods as "Frankenfoods," and many people vehemently oppose them. European Union officials are considering a ban on certain GM corn seeds grown by Dow (NYSE: DOW) and Syngenta (NYSE: SYT), and China itself has only just begun warming to them. Origin's GM corn seeds are the first allowed to be commercially produced in the country, and there's no assurance that China's farmers will adopt the GM seeds.
Worse, there's an abundance of corn seed on the Chinese market now. China forced provincial seed authorities to separate from existing sales affiliates last year, and they ended up liquidating their inventories, thereby depressing prices. Origin ended up reporting a $22 million loss last quarter as a result, and it foresees sustained lower prices for the immediate future.
Sowing seeds of discontent
The controversy that surrounded the introduction of StarLink corn by Aventis -- now Sanofi-Aventis (NYSE: SNY) although it sold off its agricultural business to Bayer -- where GM corn found its way into the food chain is a cautionary tale for Origin investors. The biotech will need to keep its traditional corn segregated from the GM corn to ensure that the two don't mix. A slip-up like Aventis' where even Kellogg (NYSE: K) cereal and Yum! Brands' (NYSE: YUM) Taco Bell brand tacos were "contaminated" could be devastating to Origin, particularly since it has no insurance to cover lawsuits against such an occurrence.
China's already had its own little scandal with GM rice seeds that were illegally sold to unwitting farmers. The scientist at the heart of the scandal is associated with the Chinese Academy of Sciences, an institution that Origin works closely with. Although there are no apparent ties between him and Origin, any whiff of impropriety on its part and the damage to Origin's reputation could be irreparable.
Foolish final thoughts
There's no perfect stock. Every company has a flaw. Yet the Foolish investor would do well to know what those flaws are before committing money to a stock. There's nothing to say that the potential problems identified above will come to pass for Origin Agritech, but Fools can do right for themselves by knowing what can possibly go wrong.
That's not me. I want to know what can go wrong with my stocks. If my money's on the line, I don't want to be blindsided. That's why one of the first parts I read in a company's annual report is the section on risks. It's the dumping grounds for companies to lay out all the things that could go wrong with their business. In essence, I want to know the short case for my stock.
The germ of an idea
Origin Agritech (Nasdaq: SEED) has planted the seeds of a high-growth business. It develops corn, rice, cotton, and canola seeds for sale in China and operates in a field where foreign competitors such as Monsanto (NYSE: MON) are severely restricted or prohibited. With products that meet a burgeoning Chinese market need and a government license to be the sole manufacturer of a new genetically modified (GM) corn seed, Origin Agritech would seem poised for a bountiful harvest. So what might cause a blight on this investment?
Lend me your ears -- of corn
Origin's GM phytase corn is expected to be one of the first transgenic corn products approved and sold in China. The enzyme phytase is present in the digestive systems of many plant-eating animals and enables them to breakdown phytic acid. By genetically modifying the corn, Origin Agritech hopes to reduce the need for inorganic phosphate supplements to be added to the feed, thereby reducing phosphate pollution, which can lead to algae bloom and freshwater contamination -- potentially serious environmental hazards.
Yet critics derisively refer to GM foods as "Frankenfoods," and many people vehemently oppose them. European Union officials are considering a ban on certain GM corn seeds grown by Dow (NYSE: DOW) and Syngenta (NYSE: SYT), and China itself has only just begun warming to them. Origin's GM corn seeds are the first allowed to be commercially produced in the country, and there's no assurance that China's farmers will adopt the GM seeds.
Worse, there's an abundance of corn seed on the Chinese market now. China forced provincial seed authorities to separate from existing sales affiliates last year, and they ended up liquidating their inventories, thereby depressing prices. Origin ended up reporting a $22 million loss last quarter as a result, and it foresees sustained lower prices for the immediate future.
Sowing seeds of discontent
The controversy that surrounded the introduction of StarLink corn by Aventis -- now Sanofi-Aventis (NYSE: SNY) although it sold off its agricultural business to Bayer -- where GM corn found its way into the food chain is a cautionary tale for Origin investors. The biotech will need to keep its traditional corn segregated from the GM corn to ensure that the two don't mix. A slip-up like Aventis' where even Kellogg (NYSE: K) cereal and Yum! Brands' (NYSE: YUM) Taco Bell brand tacos were "contaminated" could be devastating to Origin, particularly since it has no insurance to cover lawsuits against such an occurrence.
China's already had its own little scandal with GM rice seeds that were illegally sold to unwitting farmers. The scientist at the heart of the scandal is associated with the Chinese Academy of Sciences, an institution that Origin works closely with. Although there are no apparent ties between him and Origin, any whiff of impropriety on its part and the damage to Origin's reputation could be irreparable.
Foolish final thoughts
There's no perfect stock. Every company has a flaw. Yet the Foolish investor would do well to know what those flaws are before committing money to a stock. There's nothing to say that the potential problems identified above will come to pass for Origin Agritech, but Fools can do right for themselves by knowing what can possibly go wrong.
Tuesday, April 1, 2008
Mosaic Earnings Should Provide Upside Surprise
Mosaic Company (MOS):
Mosaic Company is another high flyer. MOS will have its conference call on Friday, April 4th at 10 am eastern time. Consensus estimates for Mosaic have grown steady for the quarter, starting out at .86 cents and standing at .95 cents today.
We expect MOS to report earnings above Wall Street’s expectations.
One of MOS’s competitors, Monsanto (MON) should give us a sneak peek as to what to expect from MOS. Monsanto will release their earnings before the market opens on Wednesday. Investors should keep a close eye on Monsanto, as both MOS and MON are benefiting from the same metrics; the rise in fertilizer and commodity prices.
If Monsanto knocks the ball out of the park, expect Mosaic to do the same.
Again, aggressive traders might want to look at the April 105 or 110 calls. With a positive earnings surprise and some upward guidance from management, we feel $120 is not out of the question. At $120 by April 7th, the 105s offer up 120% gains and the 110 calls 142% based on Friday’s closing prices of $7.70 and $5.40 respectively
Mosaic Company is another high flyer. MOS will have its conference call on Friday, April 4th at 10 am eastern time. Consensus estimates for Mosaic have grown steady for the quarter, starting out at .86 cents and standing at .95 cents today.
We expect MOS to report earnings above Wall Street’s expectations.
One of MOS’s competitors, Monsanto (MON) should give us a sneak peek as to what to expect from MOS. Monsanto will release their earnings before the market opens on Wednesday. Investors should keep a close eye on Monsanto, as both MOS and MON are benefiting from the same metrics; the rise in fertilizer and commodity prices.
If Monsanto knocks the ball out of the park, expect Mosaic to do the same.
Again, aggressive traders might want to look at the April 105 or 110 calls. With a positive earnings surprise and some upward guidance from management, we feel $120 is not out of the question. At $120 by April 7th, the 105s offer up 120% gains and the 110 calls 142% based on Friday’s closing prices of $7.70 and $5.40 respectively
Agricultural Chemicals
Agricultural Chemicals Mixed at Market Open, Following UBS and Lehman Brothers News
NEW YORK (AP) -- Shares of agricultural chemical companies were mixed in Tuesday morning trading, following news that UBS AG and Lehman Brothers Holdings Inc. are working to raise cash.
The news lifted the broader market, as the announcements by both banks offered hope that financial services companies are trying to boost their capital bases.
Here's how some agricultural chemical companies fared on Tuesday:
Monsanto, down $5.34, or 4.8 percent, to $106.16.
NEW YORK (AP) -- Shares of agricultural chemical companies were mixed in Tuesday morning trading, following news that UBS AG and Lehman Brothers Holdings Inc. are working to raise cash.
The news lifted the broader market, as the announcements by both banks offered hope that financial services companies are trying to boost their capital bases.
Here's how some agricultural chemical companies fared on Tuesday:
Monsanto, down $5.34, or 4.8 percent, to $106.16.
Farmers Feed Fertilizer Maker's Top Line
LAST WEEK IN a write-up of tractor maker Deere (DE) I noted that the price of corn has more than doubled since 2004. Yet on Monday the Department of Agriculture reported that America's farmers are expected to plant 8% less corn this year. That sounds counterintuitive; higher prices, any economics teacher will tell you, are supposed to act as an incentive to produce more.
But other crop prices are inflated, too, and corn is costly to grow. A bushel of corn sells for about $5.65 and a bushel of soybeans around $12. Yet it takes 1.5 to 2.0 pounds of fertilizer nutrients to grow a bushel of corn, vs. 1.0 to 1.5 pounds for a bushel of soybeans, according to the Fertilizer Institute. Those nutrients, like nitrogen, phosphorus and potassium, have soared 130% in price since 2000. Industry experts cite five reasons for the run-up: surging demand for protein-rich foods in emerging markets; increased transportation costs; a subsidized corn-for-fuel effort in America; high prices for natural gas (a fertilizer feedstock); and a weak dollar, which raises the cost of imported fertilizer.
All this has done marvelous things for Calgary-based Agrium (AGU), a major fertilizer producer. This column called its stock a bargain at $15 and change in December 2003. It's about $62 now. The stock lost nearly 4% Monday on news of farmers forsaking corn for soy, since corn uses 43% of America's fertilizer. Soy planting is expected to increase 18% this year. Aside from the cost advantages, soy is said to be an excellent third-year rotation crop for corn farmers, since it replenishes nitrogen in soil.
Last year sales for Agrium surged 26% to $5.27 billion. Adjusted profit soared 161% to $441 million. The stellar year earned the company a spot in our Accelerating Sales Growth screen. It looks for companies whose sales have increased by at least 20% a year over the past three years, and by faster rates over the past year and past quarter. See the screen recipe for details on all the criteria and use SmartMoney's stock screener anytime to run the search for Yourself. It recently produced eight survivors from a starting database of 8,000.
Agrium has offered $2.65 billion for UAG, the largest retailer of stuff needed to run farms in the U.S. and Canada. Canada's competition regulators approved the deal in January. U.S. Federal Trade Commission approval is pending. Agrium says it's confident the deal will close this summer. That seems reflected in Wall Street's forecasts. Sales and profits this year are expected to increase 70% and 69%, respectively.
The growth puts shares at just 11.7 times this year's earnings forecast, well below the S&P 500 index median of 14.3. Remarkably, the stock carries a far more modest price/earnings ratio than when we highlighted it in 2003. Back then it sold for 19 times the current-year forecast. The low P/E suggests that investors believe the earnings on which the ratio is based are temporarily swollen by abnormally high fertilizer prices. Industry groups contend that prices aren't all that abnormal relative to other crop resources. The Fertilizer Institute notes that while fertilizer started the year 141% above its early 1990s price, the price of seed, farm machines and labor increased between 78% and 111% during that period, while fuel shot up 195%.
But other crop prices are inflated, too, and corn is costly to grow. A bushel of corn sells for about $5.65 and a bushel of soybeans around $12. Yet it takes 1.5 to 2.0 pounds of fertilizer nutrients to grow a bushel of corn, vs. 1.0 to 1.5 pounds for a bushel of soybeans, according to the Fertilizer Institute. Those nutrients, like nitrogen, phosphorus and potassium, have soared 130% in price since 2000. Industry experts cite five reasons for the run-up: surging demand for protein-rich foods in emerging markets; increased transportation costs; a subsidized corn-for-fuel effort in America; high prices for natural gas (a fertilizer feedstock); and a weak dollar, which raises the cost of imported fertilizer.
All this has done marvelous things for Calgary-based Agrium (AGU), a major fertilizer producer. This column called its stock a bargain at $15 and change in December 2003. It's about $62 now. The stock lost nearly 4% Monday on news of farmers forsaking corn for soy, since corn uses 43% of America's fertilizer. Soy planting is expected to increase 18% this year. Aside from the cost advantages, soy is said to be an excellent third-year rotation crop for corn farmers, since it replenishes nitrogen in soil.
Last year sales for Agrium surged 26% to $5.27 billion. Adjusted profit soared 161% to $441 million. The stellar year earned the company a spot in our Accelerating Sales Growth screen. It looks for companies whose sales have increased by at least 20% a year over the past three years, and by faster rates over the past year and past quarter. See the screen recipe for details on all the criteria and use SmartMoney's stock screener anytime to run the search for Yourself. It recently produced eight survivors from a starting database of 8,000.
Agrium has offered $2.65 billion for UAG, the largest retailer of stuff needed to run farms in the U.S. and Canada. Canada's competition regulators approved the deal in January. U.S. Federal Trade Commission approval is pending. Agrium says it's confident the deal will close this summer. That seems reflected in Wall Street's forecasts. Sales and profits this year are expected to increase 70% and 69%, respectively.
The growth puts shares at just 11.7 times this year's earnings forecast, well below the S&P 500 index median of 14.3. Remarkably, the stock carries a far more modest price/earnings ratio than when we highlighted it in 2003. Back then it sold for 19 times the current-year forecast. The low P/E suggests that investors believe the earnings on which the ratio is based are temporarily swollen by abnormally high fertilizer prices. Industry groups contend that prices aren't all that abnormal relative to other crop resources. The Fertilizer Institute notes that while fertilizer started the year 141% above its early 1990s price, the price of seed, farm machines and labor increased between 78% and 111% during that period, while fuel shot up 195%.
Subscribe to:
Posts (Atom)
