Daily Archives: May 11, 2008

A Requiem For Ethanol (ADM)(AVR)(VSE)

Very few people drive down the miles-long highways and dirt roads in the middle of the country to see combines cut grain and fertilizer trucks spread chemicals. The picture is not monochromatic, at least not up close.

The expense of commercial fertilizers is so high that growing pastures for feed cattle is no longer viable. Processed human waste in pellet form is one of the few remaining methods for improving field production for crops which do not bring high prices. An entire segment of the agricultural industry is being forced to it knees.

At the same moment, farmers of corn, wheat, rice, and soybeans cannot plant enough crops to keep up with demand. The price of fertilizer matters much less to them.

New data from The U.S. Agriculture Department show a drop in total acres devoted to corn added to demand for ethanol production will keep prices for the commodity high through 2009. Corn now has to compete with other crops for yield-per-acre.

According to The Wall Street Journal "the U.S. ethanol industry is projected to use a record four billion bushels of corn, or one-third of the harvest that U.S. farmers are expected to collect this autumn." The federal government has provided a number of incentives to keep the ethanol industry in business. The desire to replace oil demand is a powerful, but perhaps lost cause. At. least for ethanol.

Wall St. is already creating the beginning of the end for ethanol stocks. Shares in Aventine Renewable Energy (AVR) are down to $4 from a 52-week high of nearly $20. Verasun (VSE) is off to $6 from a 52-week high of over $18  Of course, larger companies like ADM (ADM) have a small part of their business devoted to ethanol production, so small that the impact to the value their shares has been largely insulated.

As the choice with commodities like corn moves to one of food versus fuel and commodities prices versus the price of gasoline, ethanol companies are bound to lose.

Every once in awhile a promising industry grows up and then disappears, both in the matter of a few short years. The ethanol business is one of them

Douglas A. McIntyre

Posted on: May 11, 2008 – 6:47 pm in Oil & Gas, , ,

Is Financial Recovery A Mirage?

There is a new feeling suffusing the financial markets that the worst of the credit crisis is over. The Fed has done most of its work. US citizens are about to get their tax rebates. Large financial companies like Citigroup (C), Merrill Lynch (MER), and Lehman (LEH) have raised enough money to keep their heads above water.

All of that may not be as likely as it seems. Goldman Sachs has put the damage of the current housing and credit crisis at $500 billion, which means that the profuse bleeding in the system has not been stanched.

According to Reuters "Goldman Sachs economists expect a total of $500 billion in residential mortgage credit losses, a renewed slowdown in economic activity after the near-term boost from fiscal stimulus, and no monetary policy tightening in 2008 or 2009, according to a research note from the firm."

It is a pessimist’s case which is deeply disturbing. But, it has begun to show in share prices, if the market is, indeed, wise.

Looking back over the last six months, the stocks of Citigroup and Lehman were both off 50% from November to March. Those deficits had closed to only 20% two weeks ago. But, they have now both slipped to being off 30% since November, a sharp move down in such a few days.

The bull case for financial stocks is that the Fed and investments from sources like sovereign funds have saved them. The bear case is that the fundamental troubles with mortgages and consumer spending are a deep undertow which will surreptitiously begin to drag them out to sea.

The housing and mortgage crisis is getting worse and that trumps all other cases.

Douglas A. McIntyre

Posted on: May 11, 2008 – 6:02 pm in Economy, , ,

China Creates Competition For Airbus And Boeing

Neither Airbus nor Boeing (BA) seem to be able to get their newest airplanes to customers on time. The Airbus super-jumbo A380 has frustrated the company’s customers for the better part of two years. The plane may be big and efficient, but if it never makes it into service, what difference does it make?

Boeing (BA) has suffered repeated sefl-inflicted humiliation at it continues to push back the final delivery date of the 787 Dreamliner. The chance of a large strike at the company could make the problems worse and Boeing’s earnings are not immune from the tardiness. Several large airlines are also asking for compensation because they won’t have their Dreamliners on contracted delivery dates.

China may end up capitalizing on all of this and begin to push the two international airplane companies out of it market, which will becomes the world’s largest. According to Reuters, "Europe’s Airbus has forecast that China’s domestic market will increase fivefold by 2026."

The central goverment in the world’s most populated country has now set up its own firm to build and market large commercial planes. China Commercial Aircraft Co has been established to make aircraft with 150 seats and more.

China will not be able to get larger jets into production anytime soon. But, if it can have deliveries scheduled within the next decade it could significantly vex the efforts of Boeing and Airbus in the country. If the new Chinese company can deliver just one plane on time, it will have a big head start.

Douglas A. McIntyre

Posted on: May 11, 2008 – 5:17 pm in Aerospace,

Breaking Up Exxon Mobil (XOM) To Create Value

Oil companies are not typically the stuff of break-up actions. What would be the purpose of knocking Exxon Mobil (XOM) or Conoco (COP) into two pieces?

Some of the answer to that comes from Canada. Encana, one of the largest oil and gas companies in the world, will cut itself in two. One new company will run the oils sands business of Encana. Another will handle natural gas.

A look at Exxon’s "upstream" operations, which handle exploration and production shows that those businesses are growing quickly, especially outside the US. Earnings at the overseas "upstream" divisions  at Exxon were  $7.2 billion in the first quarter of this year compared to $4.9 billion in the period a year ago. The US earnings also grew from $1.2 billion to $1.6 billion.

"Downstream" operations at Exxon, which include refining and distribution, have done more poorly recently. The businesses had decreases in net income in the first quarter. The earnings drop in the US part of this company was more than 50% from $839 million last year to $398 in the most recent period. The refining industry has more and more obstacles as it get less margin out of the products it yields.

Exxon’s chemicals operations have also encountered rough going. Earnings in the US and overseas both dropped by double digits.

The "upstream" businesses at Exxon clearly carry a higher valuation than the balance of its operations. There is a lesson in Encana’s move.

Exxon may be worth more in three pieces than it is a single conglomerate.

Douglas A. McIntyre

Posted on: May 11, 2008 – 4:31 pm in Oil & Gas, ,

Solar Earnings On Deck (JASO, LDK, CSIQ, YGE)

This week is an extremely important week for solar stocks and alternative energy stocks. JA Solar Holdings Co. Ltd. (NASDAQ: JASO), LDK Solar Co.Ltd. (NYSE: LDK), Canadian Solar Inc. (NASDAQ: CSIQ), and Yingli Green Energy Holding Co. Ltd. (NYSE: YGE) are all up on the earnings deck this week.

JA Solar Holdings Co. Ltd. (NASDAQ: JASO) is the first of the solar companies to watch.  Monday’s estimates from First Call are $0.10 EPS on $146.6 million in revenues.  The next quarter estimates are $0.15 EPS and $179.9 million, while fiscal Dec-2008 are $0.85 EPS on $984.4 million.  JA Solar is Chinese and it is thought of by many as one of the cheapest cost producers with some of the closest and firmest supplies of silicon to make solar pv cells.  This has been a monster performer since coming public early last year and many consider it one of the cheapest of the solar stocks.

LDK Solar Co.Ltd. (NYSE: LDK) is also set to report earnings Monday, and this has been one of the more controversial names in solar power for traders.  It is still down more than 50% from its highs, and is now up almost 100% from its lows since right before we covered this one securing silicon contracts and having its orders fully booked up.  We already gave guidance for its targets but the estimates for this quarter are $0.39 EPS on $217.29 million in revenues.

On Tuesday, we’ll see earnings out of Canadian Solar Inc. (NASDAQ: CSIQ).  This solar player’s estimates from First Call are $0.31 EPS on $151.88 million in revenues.  Next quarter estimates are $0.34 EPS on $167.6 million in revenues, and the fiscal  Dec-2008 estimates are $1.60 EPS on $730.7 million in revenues.  This one is up huge by some 400% or more since its September 2007 lows.

On Thursday morning, we’ll see earnings out of Yingli Green Energy Holding Co. Ltd. (NYSE: YGE).  First Call has estimates pegged at $1.33 EPS on $1.47 Billion.  Estimates for next quarter are $1.38 EPS on $1.5 Billion in revenues and fiscal Dec-2008 estimates are $6.54 EPS on $6.84 Billion in revenues.

As a reminder, many estimates will have changed by the time the Tuesday and Thursday report gets here.  Also, with the performance that has been seen in these names you have to understand that for any real rally to be sustained based upon the actual earnings report that these have to "beat earnings targets and raise guidance."  Those that don’t beat will likely either see profit taking or just outright short selling.

Jon C. Ogg
May 11, 2008

Posted on: May 11, 2008 – 6:31 am in Alternative Energy, Earnings, , , ,

Sprint’s Up… Earnings, Merger, or Deals To Dominate (S, CLWR, DT)

Sprint Nextel Corp. (NYSE: S) is set to report earnings on Monday morning, with an earnings conference call to follow at 8:00 AM EST.  First Call has estimates at $0.02 EPS on $9.41 Billion in revenues.  Estimates for the coming quarter are $0.04 EPS on $9.25 Billion in revenues, and estimates for Fiscal Dec-2008 are $0.12 EPS on $36.67 Billion in revenues.

The only real question besides wondering if the company’s earnings report now even matters at all is if the bar has been set so low that it can’t be stepped over.

We are in the camp that the earnings are going to be awful and largely irrelevant.  There have been persistent rumors that Deutsche Telekom (NYSE: DT) is going to spring for the flailing telecom giant.  We already saw teh WiMAX deal for 2009 and beyond get announced with Clearwire (NASDAQ: CLWR) and every other technology giant.  And we know that there is interest from current and past leaders of the company in perhaps taking it private.

The good news is that this stock has finally busted out of that long-term downtrend on the chart.  That doesn’t mean it will do a V-reverse, but it means the worst has been seen.  Shares were over $20 a year ago, and shares have gone as low as $5.48.  Now at $9.38 on Friday, you have to wonder if a higher bid will come much higher since this has now risen some 70% from the lows.

Sprint could easily be trading at $11.00 or higher, and just as easily it could be back down to $8.00.  The only thing you can hope for on the earnings front itself is that the news could be less horrible than fears.  Otherwise it will take more buyout talk or more deal making to add substantial value.

Jon C. Ogg
May 11, 2008

Posted on: May 11, 2008 – 6:01 am in Earnings, Telecom, WiMAX, Wireless, , ,