Thursday, April 24, 2008

Three Agriculture Stock Earning Reports this AM - POT, CNH, BG

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We have 5 major agriculture names reporting today - POT, CF, BG, TNH, CNH - all components of the agriculture ETF Market Vectors Agribusiness (MOO) [Sep 17: This MOO For You? An ETF to Play the Global Agriculture Boom]

I'll touch on 3 of the 4 that reported this morning; due to some intracompany relationship issues with TRA I don't bother with TNH (Terra Nitrogen). CF Industries (CF) reports after the bell.

First, there are no surprises here in Potash (POT) - we expected a huge quarter with increased guidance. We got it. The question is what is already built into the stock. Everyone already expected this; the stocks need to take a break sooner rather than later after a huge run. I have my lowest allocation to this group since day 1 of the fund but I will be adding materially on dips (which I believe to be imminent). A lot of people have piled into the train of late, but I wrote back in October how low (i.e. wrong) the analysts expectations were [Oct 23: Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash Ahead of Earnings] - and even now I believe they are low... but finally they seem to be getting the picture. Ironically, I follow about 200 stocks and 8-9 sectors closely. These analysts follow 5-8 stocks and 1 sector. Yet they could not see what was plainly obvious to some of us long ago. From that entry....

How wrong have analysts been on 2008 estimates? Let's look at the gurus analysis!
  1. Mosaic 08 estimates 90 days ago $2.04. 30 days ago $2.94. Now? $3.61 - only wrong by 77% 90 days ago and wrong by 23% 30 days ago. Oops.
  2. CF Industries has yet to report but 08 estimates 90 days ago $3.27. 30 days ago $4.19. Now? $4.93. Only wrong by 51% (and we are still awaiting the new estimates post earnings) from 90 days ago, and wrong by 18% (so far) from 30 days ago. Oops.
  3. Potash 08 estimates 90 days ago $3.51. 30 days ago $4.02. Now? $4.30. This one the analysts got 'somewhat right' - "ONLY" off 23% from 90 days ago and 7% from 30 days ago. But again they have yet to report so I expect the 08 number to be pushed up yet again post earnings.
Now half a year later, those numbers look like fantasy - they've all been blown out of the water. As will 2009s. On to the Potash report
  • Potash Corporation of Saskatchewan Inc. (PotashCorp) today announced record first-quarter results with earnings of $1.74 per share(1) ($566.0 million), a 181 percent increase over the $0.62 per share ($198.0 million) recorded in last year's first quarter and 50 percent higher than the previous record of $1.16 per share set in the fourth quarter of 2007.
  • The pressure to increase global food production continued to drive demand for potash, phosphate and nitrogen and pushed prices for all three nutrients to new heights. As a result, each segment contributed record gross margin and raised total gross margin for the quarter to $856.0 million, up from $369.7 million in last year's first quarter.
These fertilizer companies write long, detailed and instructive earnings reports with some macro themes behind them so I enjoy reading them. It's a worthwhile investment of time to read through them for anyone new to the group. For example
  • The ongoing growth in global food demand has brought issues of food security and food inflation to the forefront around the world. In contrast to the slowdown in the US economy, China, India and other Asian countries are continuing to experience significant, long-term population and economic growth. Because of this growth, people in these countries require more food and can afford a more nutritious diet that includes protein from meat sources. This requires an ever-increasing number of animals for food production and millions of additional tonnes of feed grains.
  • "The global need to increase food production is real and immediate, and it will be a part of our world for the foreseeable future," said Doyle. "It took nearly a decade to empty the global grain cupboard and we can't refill it overnight. The good news is that the world is more than capable of producing enough food, but improved farming and fertilization practices will be required. With our unique ability to incrementally raise our potash production to meet world demand over the next several years, we look forward to helping farmers increase food production as we deliver continued growth for our shareholders."
This is only about 10% of what is in the report. Bottom line, they beat, will beat, and will continue to beat earnings expectations... while raising guidance.

Next we go to Bunge (BG) which frankly is a name I have not been following too closely but the magnitude of today's beat was impressive. But again, all this good news is priced into these stocks near term... setting up classic buy the rumor, sell the news reactions...
  • Bunge Ltd (BG) shares on Thursday rose 7.7 percent in premarket trading after the fertilizer producer and oilseed processor said it earned nearly twice as much in the first quarter as Wall Street had expected due to soaring world demand for food and fertilizer.
  • Bunge raised its full-year earnings forecast to $7.10 to $7.40 per share, up from previous guidance of $6.01 to $6.30.
  • Corn, soybeans, rice and wheat prices have hit record highs this year amid rising global demand for food and smaller crops from some key exporters. Surging prices have prompted farmers in the United States and South America to plant more acres, which helped Bunge post a record profit in its fertilizer business.
  • Fertilizer profit could climb even higher because price increases in March and April were not fully reflected in the first-quarter earnings, J.P. Morgan analyst Pablo Zuanic said in a research note on Thursday. Bunge is the largest fertilizer producer and supplier in South America.
  • "We believe there may be much greater upside to guidance if fertilizer price conditions remain where they are and grain markets remain high, favoring economics for the agribusiness unit," he said.
  • White Plains, New York-based Bunge said earnings rose to $289 million, or $2.10 per share, compared with $14 million, or 5 cents per share, a year earlier when the company had trading losses. Analysts had expected Bunge to earn $1.06 per share, according to Reuters Estimates.
  • Revenue rose 70 percent to $12.47 billion, fueled by higher fertilizer prices and record prices for many agricultural commodities. The average forecast from analysts polled by Reuters was $12.82 billion. Volume, a measure that excludes currency and price fluctuations, rose 7 percent to 31.8 million tonnes.
  • Agribusiness, Bunge's largest segment, earned $251 million, compared with a loss of $13 million a year earlier. Bunge said its global assets allowed it to continue doing business amid a three-week farmer strike in Argentina that paralyzed exports.
  • Fertilizer earnings surged 269 percent to $133 million, driven by farmers planting more soybeans amid record prices.
  • Edible oils posted a gain of 183 percent, with income rising to $51 million, as results improved primarily in Europe due to price increases.
  • The only segment to see lower income was milling products, which posted a 36 percent decline to $7 million due to increased competition and higher costs.
Last we have a former fund holding, agriculture equipment maker CNH Global (CNH). I sold my agriculture equipment makers to focus on fertilizer back in January 2008 [Jan 23: Closing Last of CNH Global]. Just easier to play the same trend in a more focused manner with the fertilizer. Input costs are rising for the equipment makers with costs of their raw goods rising, and specific to CNH Global it resides in Europe hence does not have the benefit of cheap US pesos. So if I were to stay in this space I'd focus on Deere (DE) or Agco (AG) instead. I wrote in January. Last CNH Global is 1/3 construction and 2/3 agriculture so it's not a pure play.

Fund holding CNH Global (CNH) - this is an agricultural equipment name who I've dropped the exposure to quite a bit. Based on what I see on this earnings call, I will make a decision whether to keep holding or not. Going for it is the exposure to big ticket agriculture equipment - think Deere (DE). On the negative side it has a construction business and it is based on Europe; with a strong Euro I am worried about some degradation of exports. This is one benefit Deere (DE) has - with the Fed trashing our dollar to bail out the banking system Deere's products only get cheaper by the month. So this is one I am keeping a close eye on.

CNH is suffering this morning....I have to dig in a bit more when I have time to see exactly why, but again, for reasons listed above, I just think fertilizer is the easiest way to go with the least risk; especially the potash makers which have been my focus since day 1.
  • Farm equipment maker CNH Global NV (CNH) on Thursday posted weaker-than-expected quarterly profit despite a global commodity boom that's driving up sales of machinery like tractors and combines.
  • The company reported quarterly net profit rose 18 percent $112 million, or 47 cents a share, compared with $95 million, or 40 cents a share, a year earlier. Earnings excluding restructuring charges were 53 cents per share, below Wall Street estimates of 65 cents per share.
  • "Sloppy operating performance persisted this quarter," Bear Stearns analyst Ann Duignan said in a research note. "Margins were weak in a strong ag environment, highlighting our concerns about the New Holland brand in particular."
  • Agricultural sales jumped 38 percent, doubling in Latin America and up by double digits in other regions of the world.
  • "The industrial issues which negatively impacted margins in the fourth quarter of 2007 continued into the first quarter of this year, as strong demand for our agricultural products pressured both our manufacturing operations and our supplier ranks," Chief Executive Harold Boyanovsky said in a statement.
Long Potash, CF Industries in fund; no personal position

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