Tracking the Potash Strike

There's turmoil in the fertilizer market as the largest producer of potash, a necessary ingredient in fertilizer, Potash Corp of Saskatchewan, has faced strikes at 3 of its mines. These mines account for 6 percent of total supply for the mineral.

The strike began about a month ago, but hasn't shown any progress in being resolved thus far. Here we're going to recount what's been happening lately.

August 8, 2008

A lengthy strike at three potash mines owned by the world's largest fertilizer producer, Potash Corp of Saskatchewan, could mean shortages and spiking prices in a market that is already too tight for comfort, analysts said ...

The three mines represent 18 percent of Canadian capacity and 6 percent of world capacity, he said. As the autumn fertilizer application season approaches, supply problems could develop if the dispute is not resolved, he added.

When a Russian competitor's shipments were threatened by a sinkhole last year, producers including Potash Corp stopped selling and prices shot up, even though supplies were not ultimately disrupted, noted Morningstar analyst Ben Johnson

Each week of the strike could hurt company earnings by up to 6 cents a share, but that could be offset by higher potash prices, RBC Capital Markets analyst Fai Lee wrote to clients.

August 19, 2008

A strike at three Canadian potash mines owned by Potash Corp of Saskatchewan could affect shipments to industrial customers, which account for about 5 percent of the company's sales, a Potash Corp spokesman said...

The three Saskatchewan mines account for 30 percent of Potash Corp's production and about 6 percent of world capacity.

Potash producers have been unable to keep up with demand for the fertilizer as record crop prices give farmers the means and motivation to apply more potash to soil to boost yields -- even though prices for the mineral have soared.

The strike comes during the off season for fertilizer, and has had no impact thus far on potash prices, Barrie Bain, director of respected fertilizer consultancy Fertecon Ltd, said in an e-mail.

But that could change if the strike lasts beyond mid September, when demand starts to pick up, Bain said.

"If the strike continues into October, we could then start to see a significant impact on prices," he said.

August 29, 2008

"Absent a settlement, we believe Potash Corp may soon be forced to declare force majeure due to an inability to meet current contractual commitments," Silver wrote.

A strike lasting eight weeks would reduce the company's potash output by 240,000 to 270,00 tonnes, Silver said, costing it 15 to 20 cents per share.

But he did not change his third-quarter earnings estimates of $3.80 per share nor 2008 estimates of $13.25 per share, noting ammonia fertilizer prices have strengthened.

Essentially, the JP Morgan analyst of the last article is saying that even though Potash Corp will sell ~255,000 tons of potash less due to the strike, their earnings won't be affected for the current year. He's basing this on the assumption that potash prices will rise in response to a depleted supply, and make up for the weaker sales.

What I feel like everyone is missing is that this should be great news for Mosaic (MOS), Agrium (AGU), Intrepid Potash (IPI) and just about anyone else who is lucky enough to sell potash. While, Potash's earnings will be on target according to this analyst, the other companies should see increased earnings because they get to benefit from the higher prices, while their supply remains consistent.

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July Spending Down, Inflation Still Powers Through

Consumer spending for the month of July slowed to a 0.2% increase over June. This is down from a 0.6% increase in June. It seems like the tax rebates are wearing off. We can see that in America at least consumers want to spend. They just don't know what to spend! Bloomberg reports:

Incomes dropped 0.7 percent, the first decrease since August 2005, reflecting the end of the rebates. That was after a 0.1 percent gain the prior month, today's report showed. The median forecast was a decline of 0.2 percent.

The real meat of the consumer spending report comes with inflation adjusted numbers. This is because we may actually be consuming less, but overall paying more for it since inflation is so high. And that in fact we are:

Adjusted for inflation, spending plunged 0.4 percent, the biggest drop in four years.

Some of you might be surprised that in July, inflation on energy was still at 4% even though commodities prices seemed to have dropped a good 15-20% that month. Look for August energy inflation numbers to be lower because it takes bit of time for the price changes to reach consumers.

BTW, that's just the funniest looking piggy I could find.

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2nd Quarter GDP revised to 3.3% growth

The markets have been holding up lately and one of the little surprises life threw at us was that 2nd quarter GDP was revised up from 0.9% growth to 3.3% growth. 3.3% is no insignificant number. In any other situation I would say that our economy is rollin!

But that`s any other situation.

Economists had predicted GDP to be around 2.7% based off the fact that the tax rebates would help stimulate consumer spending. And spend they did.

Consumer spending added 1.24 percentage points to GDP in the second quarter after adding 0.61 percentage points to GDP in the prior quarter.

The main drivers of our economy in the second quarter were the tax rebates and a rise in exports thanks to our very friendly debilitated dollar.

Real exports of goods and services were revised up sharply to a 13.2% gain from the 9.2% gain first reported. That's the biggest increase since the third quarter of 2007. Real imports fell 7.6%, which is the biggest drop since 2001.

If your currency is weak does that mean exports rise and imports fall? Yup.

Remember the first estimate of 2nd quarter "growth" was 0.9%. A jump to 3.3% is rather good news. However, because this was fueled by a one-time tax rebate, we know that it's not sustainable. That's all we care about, because we're trying to value companies for the future.

Plus, with wages dropping/stagnating the way they are while inflation rises, do you really think consumers can afford to spend more?

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It's That Time Again--Housing Report

Yesterday, the NAR released housing data for the month of July. I would've had this up for you yesterday, but being that this site just relaunched today you'll have to forgive me. Next time you are free to comment-bash however!

Before I give you data, remember that monthly housing data needs to be compared year over year, and not month to month because of seasonal effects. So knowing that:

• Existing home sales for July 2008 was 5 million on a seasonally adjusted basis
  
• Existing home sales dropped 13.2 percent from July 2007
• Existing home sales rose 3.1 percent from June 2008
• Average home prices dropped 7.1% from July 2007. (Average sale in July-08 was $212,400. Average sale in July-07 was $228,600)

On a national level, the housing "meltdown" doesn't seem that bad. Whenever house prices decline it's bad news, especially considering how millions of people put very little down and are in negative equity positions. Still, 7% seems palatable.

But those "hot zones" of the housing boom are getting pummeled. Los Angeles, San Diego, Riverside.. basically all of Southern California plus Miami and more.

The median price in the West was $273,200, down 22.2 percent from a year ago.

It's going to be a while until this economy gets rid of all its excesses...

More juicy data:

• housing inventory at the end of July rose 3.9 percent to 4.67 million existing homes available for sale
• The rise in supply results from a sharp increase in condo inventory; the single family supply declined
• According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 6.43 percent in July from 6.32 percent in June; the rate was 6.70 percent in July 2007

So there is a bit of good news to be extracted. The supply situation for single family homes actually declined. But being that home prices have dropped, and more people will be in negative equity, it's likely that foreclosures are going to be running strong for a while.

The only way to get some equilibrium out of this whole mess is for buyers to buy thinking that house prices are way too low. But how is that going to happen when no one wants to lend? and after 4 percent of interest rate cuts over the past year, the 30-year mortgage rate has only decreased by 0.27 percent?

Not good news.

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Analyst's Forward Estimates - A Lagging Indicator

It's quite ironic, but can we now all agree that the forward estimates analysts project are very much a lagging indicator on the performance of a company?

In this whole credit crisis we've been experiencing, the economy turned sour and the outlook for businesses looked worse and worse. We were simply waiting for analysts to downward revise earning's estimates. We knew it was coming, we just didn't know when.

According to Bloomberg:

Analysts trying to forecast U.S. earnings missed the mark by the biggest margin in at least 16 years last quarter as bank credit losses topped $500 billion and oil surged to records, according to Bloomberg data.

Analysts "correctly" predicted data for only 6.7 percent of the companies they followed. Now I'm not sure what "correctly" actually means here (spot on? or within a certain range?) but 6.7 percent is not a good probability to be basing your investments on.

At the start of the year, profits at banks, brokers and insurance companies were projected to rise 22 percent in 2008, according to the average estimate of analysts surveyed by Bloomberg. They're now expected to decline 48 percent. Analysts forecast an 11 percent gain in retailer earnings when 2008 began, compared with an 11 percent drop now, according to data compiled by Bloomberg.

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Chesapeake insider trading indications

Insider trading is technically legal so long as insiders buying or selling shares of their own company properly report their actions in advance. Therefore, these filings are made public, even if it is several weeks after the activity. If there is anyone that knows a company in and out, it would be the insiders of a company, such as the chief executive, financial officers, directors, and presidents. Many times, insider trading can mean nothing at all. For example, Bill Gates has been unloading hundreds of millions of shares of Microsoft, mainly due to his retiring and pursuing other activities.

The stock whose insider activity caught my attention was Chesapeake Energy, the largest independent natural gas producer in America. Natural gas stocks seem to move in such huge swings, so I wouldn’t want to brashly jump in until there is a more concrete indication of a turnaround. However, CEO Aubrey McClendon hasn’t sold a single share in the past five years. Rather, he’s been aggressively purchasing, and at an even more accelerated pace now than before.

So far in 2008, he has purchased over $200 million worth of stock at prices as high as $60, around 40% above the low $44-range it is trading at right now. My thinking is that perhaps, he knows something within the natural gas sector that us regular investors aren`t privy to. Anything related to energy can be affected immensely by elections and policies, and Mr. McClendon is definitely a well-connected man within the government, being a grandson of a senator, as are the other high-level executives within Chesapeake.

Technically, Chesapeake can still drop to $39-$40, and possibly even further, but that would mean Chesapeake has lost 50% of its value from the peak, which is absolutely ridiculous. If there is any sort of bounce off of $39 or $40, then I would get in a little by some long-term options.

Look for more on Chesapeake and natural gas in reports on alternative energy sources in coming weeks.

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Benefactors from the subprime fallout and the tightening credit aftermath

Back when I didn't know anything about stocks, I discovered stock screeners, such as the ones on Yahoo Finance. I thought I was some sort of genius and used that to cut down a list to around ten stocks. I have no idea what numbers I put in as the requirements, but one of the first stocks I ever put money into, either second or third, was EZCorp. Maybe my mind is filled with too much useless stuff right now, but I happened to check out the stock price, and adjusted for stock splits and such, I would’ve made a cool 600% had I stayed in. Cool.

I looked at the stock again because of the dire situation the economy is in right now. First off, let me explain how EZCorp and other companies within the specialty finance groups do business.By specialty, I mean these groups are often pawn shops – I know what you are thinking already… these shops are simply shady mafia hangouts chase you down if you don't pay.

However, starting in the 1984, Cash America pioneered the first publicly owned national chain of pawn shops. These small, dark shops have burgeoned into an actual financial center, even offering online lending services. The major players in this industry are EZCorp, First Cash Financial, and Cash America International. Their revenues are earned in two main ways:

• First, they make pawn loans, which are usually very small, non-recourse loans collateralized by personal property in the form of gold, watches, and other tangible goods. So to make this very clear, imagine going into a pawn store, giving in your gold watch. The associate will weigh the watch and determine how much the gold can be sold for, puts in a margin of safety and profit. So let’s say he determines the watch’s price at $250 and loans you $200. With such small loans, the margins are even higher. Many times, the watch isn’t even redeemed, as the customer is given that choice.
  
• Second, there are unsecured loans, which are like loans at the typical banks, except these are in smaller amounts, usually averaged in the several hundreds of dollars, and rates can vary and is dependent upon state regulations, but can be up to more 400%. With the economy where it is now and these companies expanding aggressively during the past decade, they simply seem to be at the right place at the right time.

So as I go through comparing these three companies, I will look for the different ways that these companies intend to continue growing. I also want to know how they deal with the high level of competition in the signature loan industry and whether this will lead to lower margins in the near future, and the other major risk factors. Let’s first differentiate these three companies, giving some facts and also some of their flaws.

EZ Corp

• two divisions - pawn loans, short term cash advances & short-term loans
• expanding into mexico in the past year or so- only several stores
• will look for growth in signature loans division, offering innovative new loan packages, and mexico expansion
• no debt - cash flow is supporting its own expansion
• disadvantage is that its too heavily concentrated in texas

Cash America International

• largest pawn chain in the country
• says its international but not really, minimal exposure internationally
• looks for growth to be in online lending, completely differentiating itself from any other pawn chain company that is listed, already running America online and just started offering loans online in UK
• disadvantage is whether it can still grow its earnings at the pace of its competitors and if the online will really be profitable … could it be the cause of their heavy debt compared to peers

First Cash Financial

• store count is 475, with 205 of those stores in mexico, heavily spread throughout mexico
• revenues in 2007 from mexico grew 32%, and looks for more growth there
• disadvantage is their auto master division where their loans issued are defaulting and thye had to raise the amount of loan provisions, and expect deteriorating economic conditions to affect this division through 2009

For a comparison of the basic numbers:


Margins like those are out of this world, and that’s why the government regulations are a major risk factor on pawn companies. We can see profit margins as well as return on equity are highest at EZCorp. What is more impressive is that they are doing this without cash. Instead, they are using some other sort of financing which I have yet to find out about.

This makes me wonder whether EZCorp would benefit from using this debt to expand. Either way, their debt is nil and Cash America’s is unusually high compared to peers. Perhaps, their internet ventures are needing lots of costs upfront, making it riskier than the others although it is larger and much more diversified. As a result, EZCorp does not have too much intangibles making up their assets (20%), compared to Cash America and First Cash which have 41% and 25%, respectively. Cash America also has cash flow growing slower, once taking out the selling of assets Cash America has been doing for the past couple years, which is due to various reasons, including legislation changes for lending rates.

I feel EZCorp is the best positioned going forward, as they have just started expanding to Mexico. There are opportunities for organic growth as many of their stores are barely over a year old, have no debt, and does not trade at so many multiples about their tangible book value, making it safer than a larger company such as Cash America International. All these companies are still in the growth stage, but First Cash Financial can be negatively affected by the subprime mortgage because of their Auto loans division.

I felt that maybe Cash America would be the most experienced and well-diversified. However, it has been dumping cash into their online lending venture that has not shown results to compensate for their spending. Although all three companies are going into 2008 and 2009 with record earnings increases year over year, their stock prices have been taken lower by the subprime crisis and associated credit crunch.

While the conditions are all lining up for another breakout year for these companies, EZCorp is clearly the most efficient while still not selling significantly above its competitors, . Pawn shops have taken on a different face, now they are corporatized and expanding rapidly over America and abroad. EZCorp is benefitting from the subprime fallout and the tightening credit practices that will follow, but its stock price does not completely reflect the earnings growth acceleration we can expect.

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