Stephen Rosenman's  Instablog

     When I last commented on Sanderson Farms in August 2008, their CEO Joe Sanderson  was praying for a miracle.  seekingalpha.com/article/92881-sanderson...
    
      Well that’s going to take a miracle and an angel or something looks to me. (conference call August 2008)

      His company was being pummeled by high feed prices.   In the call, he  implied weaker competitors would go bust  and they did (Pilgrim's Pride).  
      Well,  Mr. Sanderson's prayers have been answered.  Corn has come down to $3.67 from over $7.00. SAFM made $2.09 last quarter.  SAFM came out of the disaster stronger than ever.  Look at its peers:  Pilgrim's Pride filed bankruptcy, Tyson's and Smithfield  are struggling and are nowhere near profitable.
      SAFM was wise about its finances.  Last quarter, SAFM paid down $67 million of debt on top of a previous $45 million paid the earlier quarter.  Debt now stands at $133 million.  Over the last 6 months, SAFM has brought its debt/equity ratio from 0.71 to 0.32 without resorting to secondary offerings; it paid down its debt the old-fashioned way using profits (Who does that anymore?????).  
       SAFM just raised its dividend from 14 to 15 cents and announced a 1 million share buy back.  
       Currently the stock trades at a PE of 78.  That lofty PE reflects a -$2.56 loss Q4 2008.  Next quarter, consensus is $1.07.  Then the -$2.56 goes off, the $1.07 comes on, which should readjust the PE to a more salable 8.9.  SAFM is a strong turnaround story showing that, indeed, good management and miracles do pay off.
        Caveats:  chicken prices have been heading lower and corn feed creeping up.  This creates a drag on their earnings.  However, the big clean-up in their balance sheet makes this an excellent long term holding in the food sector.  
         The last 3 quarters, SAFM has surprised street analyst consensus.  This time set to earn $1.04 consensus.  I expect them to beat that estimate handily.

Long SAFM

      New home sales came in at 31 thousand for September which disappointed investors who had been hoping for more like 34 thousand. The market worried that the real estate market had once again fallen off a cliff as the home tax credit was ending. When the numbers came out, the homebuilders sold off brutally.  I think we have to keep these numbers in "historical" perspective.  This year's dismal home sales are way below just about anything that has been seen in 45 years.  www.census.gov/const/soldreg.pdf ; 
      Between February 1990 until October 2008, no single month came in at less 32 thousand.  Between January 1963 to January 2008, only 18 months came at less than 32 thousand and many of these occurred in the 1960s and early 1970s.  This September was the worst September since 1981. From 1998 to 2007, Septembers ranged from 53 to 94 thousand.  
       At the same time, we saw the value of September's seasonally adjusted residential  construction increase 3.9% over last month.  Moreover, September was also up over July, June and May, giving a sign that the future of housing is looking brighter. www.census.gov/const/C30/release.pdf
       The take away message:  forget one month's disappointments.  The low housing sales seen in the real estate market are the bottom.  Expect a return to more robust new home sales as evidenced by increased construction.
        Three factors will drive that:
            The larger U.S. population will push new home sales closer to historical averages.
            Congress will extend and expand home tax credits.
            Low interest rates will entice buyers.
         The way to play it:  buy the home builders.  The twelve largest of the home builders (TOL, NVR, LEN, KBH, PHM, RYL, BZH, HOV, SPF, MDC, MTH) have a collective market cap of about $16 billion and control about 17% of all residential building.  It is hard to imagine their market caps will stay so depressed.

  Back in August, I advised investors to load up on Alcon (ACL), the eye care company because, this New Year's, Novartis (NVS) could be forced to buy all of Nestle's approximately 150 million at a $181 price. seekingalpha.com/article/157961-three-wa...
  In brief, Nestle's has the right as of January 1 to sell all of its 52% share of Alcon to Novartis for 20.5% above the average of the past  week price to a maximum of $181.  I speculated that minority shareholders could piggyback on the ride to $181.
  At that time, ACL was trading at $132.  Now ACL is $143.  The "magic" price to allow Nestle's to cash out at $181 is $150.  We have been moving slowly up to that critical point.
  Novartis has stated it has no intention to buy out any remaining shareholders should Nestle's exercise its option to sell.  However, the purchase of ACL by individual investors does not depend on NVS buying out their shares.  If NVS is forced to buy Nestle's shares at $181, all remaining ACL shares should rise as well.  The $181 becomes the de facto price.
   After markets closed, Alcon (ACL) delivered a superb quarter bringing in $1.71 a share, better than expected $1.44.  Last year's quarter earnings of $2.07 included a $0.79 tax benefit. Thus nonGAAP earnings this year were 33% higher.  Revenue rose from $1.5 billion to $1.6 billion.  The company raised guidance from $6.20 - $6.35 to $6.55 - $6.65 for year 2009.  Thus ACL accomplished four amazing feats: it beat estimates, increased nonGAAP earnings, boosted revenues, and raised guidance with no accounting gimmicks. Very few companies can say the same this quarter.
   The stock after hours is trading up at $149.
   The buy call has intensified.  We're closer to New Year's.  The company's fundamentals are more than sound.  ACL soon will be $181.
    

Both molybdenum and nickel are used in the production of  steel.  Yet, the price of each has fared quite differently the last three months.   Molybdenum has tumbled from a high of $18 to $12, hurting my previous favorite Thompson Creek (TC).  In contrast, nickel has steadied at $8.69.
Why the difference in price trends?  Could nickel be benefitting by strong demand?  Certainly that's not the case as rising LME stocks show.  In fact, nickel inventories are reaching all time highs.  Stores have gone from under 10,000 to over 120,000 as production outpaces demand.

and the last three months LME inventories have shown no let up, just overflowing nickel stocks.
   So why the discrepancy between nickel price and rising stocks?  Why is nickel holding up while molybdenum is crashing?
    I think it's due to the "animal spirits" of commodity traders who are willing to bid up nickel in the face of weak fundamentals. Future traders seem to be looking at the weakening U.S. dollar and buying every commodity in sight: copper, oil , nat gas (UNG) regardless of demand and supply. That doesn't exist in the world of moly, a mineral that lacks a futures market yet has world wide applications.

  One wonders whether nickel and other commodities will follow moly's lead and tumble.

    The home builders represent probably the most "humbled" group of stocks out there, a result of a housing debacle that has seen falling home prices, credit shortfalls, and waves of foreclosures.  The home builders also represent some of the best "upside" in the market.  The stocks have fallen hard, some trading at one fifteenth of their 2005 share prices.  Share prices have fallen so low that the thirteen "biggest" builders total collectively less than $22 billion in market cap.  To put the number in perspective, 138 publicly traded companies in the U.S. trade at market caps of $22 billion or higher.  Corning, Costco, DirectTV, Potash, and Ford each have market caps higher than the sum total of all publicly traded home builders.  Add up TOL, LEN, PHM, NVR, RYL, MDC, SDF, HOV, BZH, KBH, DHI, MTH, MHO and you get the price of Ford (F)?

    When will housing come back?  One year, two, three, four, five? Who knows?  A better question to ask is: will housing come back?  That's easier to answer. First, there is a strong and dedicated political will to keep mortgage rates low,  continue housing tax incentives, forestall foreclosures, get unemployment numbers down, all of which will help the industry. Politicians know the importance of this sector: their constituency's jobs and savings are tied to housing.  Second, the companies are doing everything they can to recover:  cut costs, write down losses, buy back debt at bargain basement prices (for example, BZH and HOV recently bought back a ton of debt).  Finally, at some point, the demand supply equation will shift toward the builders. After all, you have to live somewhere.  Who will  build the homes?  The small private builders have been taken out.  There are no foreign companies equivalent to a Kia or Hyundai or Toyota  to take market share from U.S. builders.  The beaten down publicly traded home builders will be the only players and they will  bounce back.  Four years ago, KBH, BZH, HOV, SPF, LEN were trading at $83, $79, $72, $48, and $67 respectively; now they go for $15, $5, $4, $3, and $14.  Even if they only recover to eighty per cent of their former values, you get a 4 - 14 X bagger.  Not a bad gain.  Most people would be willing to wait for those kind of returns even it takes one year or five.

Long BZH

      Currency  plays a big role in multinational companies earnings.  The market right now is focusing on the weakening dollar. The plunging dollar has certainly been benefiting companies that are being paid in stronger currencies.  Little attention has been paid to foreign companies that will gain profoundly over favorable forex.  One of those companies is America Movil (AMX), the giant South American telco titan with 194 million subscribers.  Its positioned over most of Central and South America (and also includes the U.S. with Tracfone).  Over the last six months seekingalpha.com/article/151261-america-movil-benefits-from-forex,  I predicted that the Brazilian real would strengthen over the Mexican peso. I also speculated that the peso would best the U.S. dollar. I felt the big beneficiary of those forex moves would be AMX.

Those forex predictions have come to pass.  

      It's time now for AMX to reap its reward for being in the right markets.  AMX does a huge business in Brazil.  Brazil represents AMX's  largest market after Mexico.  The remarkable outperformance of the real means that AMX will experience a flood of pesos solely on currency exchange.  Last quarter, AMX benefited from favorable forex; next quarter will be even greater.  Moreover, AMX's Brazilian arm has experienced huge growth this quarter.  Last quarter, AMX gained 3.7 million subscribers of which 899,000 were from Brazil.  So far, Brazil alone for the month of August had 818,000.   July's added subscribers also look good. Brazilian growth for the quarter will far exceed last quarter's numbers.  
     Columbia is AMX's next biggest market after Brazil and Mexico.  The Columbian peso   also firmed against the Mexican peso, something which should deliver more upside to AMX's earnings.
       Further the weak dollar helps AMX in two ways.  First, ADRs become move valuable.  Second, much of AMX debt is in U.S. dollars.  I suspect that AMX was able to pay down that debt much more easily.  In addition, AMX's debt has gotten smaller simply because of a weakening dollar.  They have already paid down almost $2 billion of debt over the last 6 months.  Expect their $8.7 billion debt to go much lower.
       AMX's had growth in new subscriptions.  The balance sheet keeps getting better.  Forex has been unbelievably favorable.  AMX should have a spectacular quarter.