Daily Slaughterhouse: FCStone Group (FCSX)

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FCStone Group, Inc. (NASDAQ: FCSX) is getting crushed after its update on liquidity, credit issues, and commodity volatility.  The commodity risk management firm now expects to incur up to a $25 million pre-tax bad debt provision in the first quarter of fiscal 2009.  You will see why this is now today’s worst performing stock of liquid issues.

This is in connection with losses by three domestic accounts whereFCStone acts as the clearing firm or counterparty. These losses relateprimarily to a significant energy trading account, and to a renewablefuels account and a foreign exchange account.

Its estimated bad debt provision is expected to be adequate for allknown existing credit contingencies for the first quarter of fiscal2009 and it said that it experienced no material impacts from creditissues during the fourth quarter of fiscal 2008.

FCStone said that it has no direct credit exposure to the recent bankruptcy filing from VeraSun Energy Corporation (NYSE: VSE).

The losses if realized on an after tax basis would be approximately $15million, or $0.52 per share.   That is down from $0.45 of net incomeper quarter from continuing operations through the first three quartersof fiscal 2008 for a total of $1.36 per share for the nine months endedMay 31, 2008.

This has been an absolutely brutal year and you wonder how long thiscan go on before shareholders storm the Kansas City offices to seizethe company while it still has any value.  Shares are down a whopping46% today at $3.31 on this news.  That is just the start of theproblem.  The prior 52-week trading range had been $5.26 to $53.25.

It is hard to hold a company responsible for unexpected counterpartyrisks.  But there has been a long time brewing in this arena and thecompany should have demanded more collateral or been a better hedgerconsidering that this is an integrated commodity risk managementcompany.  It sounds more like a risk taking operation than a riskmanagement operation.

The average daily volume is only about 520,000 shares, and we havealready almost tripled that rate in 35 minutes of trading.  The marketcap is now a mere $88 million.  About all the company can be thankfulfor here is that with the stock under $5.00 it is not marginable formany trading accounts.

Jon C. Ogg
November 4, 2008