Earnings Review

A look at 2 sectors that involve the fund

First, fund holding ICICI Bank (IBN) reported:

• MUMBAI, Oct 19 (Reuters) - India's second-largest bank, ICICI Bank (IBN), on Friday reported its quarterly net profit rose by a third, with growing demand for loans in a booming economy helping it beat market forecasts.
• Net profit in July-September, its fiscal second quarter, was 10.03 billion rupees ($252 million), up from 7.55 billion rupees a year ago. (32% year over year - impressive for a stodgy industry like banking) That compares with a forecast of a 23 percent rise in net profit to 9.28 billion rupees, according to a Reuters poll of 11 brokerages.
• While there have been signs that official interest rate rises have been slowing demand for loans, Vishakha Muley, ICICI's chief financial officer, told reporters that the trend in loan growth was likely to continue given current interest rate settings.
  
• Central bank data shows that in the two weeks to Sept. 28, Indian banks' loans rose 22 percent from a year earlier, slowing from annual rates of 30 percent at the start of 2007. Analysts have also been concerned about a rise in bad loans after the central bank raised interest rates five times between mid-2006 and March.
• ICICI Bank said bad loans were 1.4 percent of its assets at the end of September, up from 1.0 percent a year earlier.
• Unlike a number of U.S. and European banks and some Asian peers, Indian lenders are believed to have little or no exposure to problems in the U.S. subprime mortgage market, which have hammered many financials firms earning.
• The bank's total deposits rose 20 percent from a year earlier to 2,283 billion rupees. Deposits in savings and current accounts grew 38 percent to account for about a quarter of total deposits.
• ICICI Bank has operations in 17 countries, and it said international operations accounted for about 22 percent of its consolidated banking assets.

Takeaway: Impressive. As Indians become more wealthy -> they have more money. When they have more money -> Indian banks have more money. Assets grow. More business = more loan creation. Etc. A virtuous cycle. Sort of like the US back in the day.....ah. While the continued interest rate hikes are a concern hopefully India can ratchet down the 9% GDP growth to 5-6% without overdoing it with the cooling measures.

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Now on to coal - I don't own Arch Coal (ACI) but it is one of the big 3 US producers so it should be a good tell for my two holdings, Peabody Energy (BTU) and Consol Energy (CNX). We knew this quarter will stink, the stocks took major hits this summer - but forward guidance and outlook is key.

• ST. LOUIS (AP) -- Arch Coal Inc. said Friday third-quarter earnings fell by nearly half as coal prices slipped amid excess supply and falling demand. Net income dropped to $27.2 million, or 19 cents per share, from $50.8 million, or 35 cents per share, in the year-ago period.
• The result was well short of analyst estimates for 27 cents per share, according to Thomson Financial.
• The company sold more tons of coal in the latest quarter, but the average price of $16.02 per ton was 2 percent lower than last year. Production costs per ton also rose, hurting profit margins.
• Arch expects coal pricing to improve in 2008 as inventories shrink, demand rises from the electricity generators -- many of which use coal-fired power plants -- and Asian steel producers order more coal from U.S. producers.
• "The positive drivers contributing to strength in international coal markets are likely to have a spillover effect into domestic coal markets," said Chairman and Chief executive Stephen F. Leer. "We have already seen coal pricing in Appalachia increase in response to these dynamics, and expect further price appreciation across all domestic coal regions as we move into 2008."

Takeaway: So it looks like this thesis is coming together well. While coal is not as secular of growth as the other portfolio holdings, I went bullish in mid September - new readers can read why by clicking here and here. With the news of 25% price hikes in Japan, and China becoming an importer the overall outlook is turning up and perhaps a bit more secular. Peabody Energy (BTU) has a distinct advantage in its large Australian exposure, and Australia = gateway to China.

I have been cutting back these positions which had risen to be 2 of the top 5 holdings in the fund, especially in Oct 10-12 area, since they ran so hard, so quickly after I bought them (surprised me to see such a quick move) and wanted to take some off the table. They are still holding well but without new cash coming into the fund like a real mutual fund, I need to move cash to other areas with better short term prospects... but I am liking the long term coal story more as the voracious appetite for energy worldwide creates yet another commodity needing to be imported.

Long Peabody Energy, Consol Energy in fund; no personal position