The Mays Report

Long/short equity, value, research analyst, commodities
The Mays Report
Long/short equity, value, research analyst, commodities
Contributor since: 2010
Company: Mays Research
NL2, thanks for your comments. Don't cover irrigation companies although during the drought of 2012 I suspected that those farmers with irrigation systems were smiling all the way to the bank although they all remained mum when asked. :-)
As for fertilizer, either prices or volumes will decline. We will have to wait and see how that plays out. Thanks again.
James, thanks for reading the article. I actually removed Syngenta AG during the editing process but yes, as a seed and crop protection company they offer a degree of risk mitigation as well that allows them to have similar pricing power as Monsanto. Mays Research does not cover S&W seed company at this time as their primary seed is alfalfa, a crop that Mays Research does not follow at this time. They do have a foot print in the wheat market but it is small.
As I have written previously the fertilizer companies are leaving a period of "perceived" above avg growth and settling into a place where valuation based on dividend growth will become more important than revenues and/or EPS. Thanks again for reading the article.
Lanza,
Thank you for reading the article and for your comments. Yes, equipment is a necessary part of the equation and investment in equipment is now declining alongside falling prices, which places farm equipment mfg in the same boat as fertilizer companies. Since equipment is a durable good, it does not require replenishment on a continuous basis.
Presently I don't cover the farm equipment companies so am unable to offer any opinion on valuation etc., beyond knowing that orders in that area are declining. Thanks again for your comment.
Burt, thanks for reading the article and for your comment. Actually, corn represents the highest pct. of input costs for poultry producers with soybean meal a close second.
I wrote in March 2013 about how I thought both Tyson Foods and Archer Daniels Midland would benefit from falling crop prices. They have indeed. Here is a link:
http://seekingalpha.co...
I've also recently written about both Pilgrim Pride & Tyson Foods. Check those recent articles out via my profile for my most recently published thoughts. Thanks again for reading and for your great comment.
NL2, thanks for reading the article. Great comment as well.
What's happening is a typical illustration of a how a business cycle affects different parts of a value chain. High crop prices benefited those upstream in the value chain like farmers as well as seed and fertilizer companies while firms downstream in the value chain closed plants and laid off workers to become more efficient. Now things are reversing as they will again and again.
As I have written about extensively, fertilizer companies are seeing lower revenues and profits for the reasons you mentioned in my opinion. Seed companies, however, seem to be able to pass on prices increases despite the falling prices. Thanks for adding to the discussion.
User 12224101, thanks for reading the article and for your comments. Aware of the recent drought reports. Production estimates in China were unchanged this month after increasing by 2MMT in July. As stated in the article, feed demand continues to be negatively impacted by animal disease.
Given that China typically maintains a stocks-to-use ratio in excess of 30% a material gain in an already low level of corn imports is less likely. As the data changes so will the analysis and forecast. Thanks again for reading the article and for your comments.
Greg, thanks for reading the article. I don't compile fish production and / or price data (If I ever begin covering a company where these data points are key I'll do so). However, I'm sure someone somewhere in the world does.
Thanks again for reading the article and for your comments.
HorgeSPhatOne, thanks for reading the article. One of the reasons I have not made a sell or short recommendation is because of the stock's high correlation with the S&P500.
I describe that relationship in this article.
http://seekingalpha.co...
Given that relationship and the markets seeming insistence on marching higher shorting the stock outright or using puts may not be a high probability event despite the firms obvious lack of growth in my opinion. Thanks again for reading the article.
Sirrealone, thanks for reading the article and better yet, outstanding anecdotal evidence from an actual consumer!
The company discussed getting beat on price during the conference call. Seems that every year there is some external reason the company can't grow when the actual reason is simply that they can't in my opinion.
Thanks again for reading the article.
Baerrus & jion, thanks for reading the article. A relatively short-run event like Ukraine has no affect on the sustainable long-run growth rate of Potash Corp. or long run market dynamics. Good luck trying to short-term trade an event like Ukraine. Thanks again for your comments.
Greg, thank you for your continued interest in my reports. I have written multiple reports regarding my opinion of the relationship between fertilizer and crop prices over the last few years. Wish I could point you to do a specific report but I am unable to at this time. I invite you take a look at my profile and look through the list of articles, perhaps those based off producer price reports.
When I think it is an appropriate time, I will likely publish an updated view on this. Right now I think that what's available is sufficient. Thanks again for participating.
Gregory, I wrote a report with my thoughts on a URALL & BPC reunion a month ago.
The link is here.
http://goo.gl/1jFfwF
Thanks again for participating.
Gregory, thanks for reading the article. You ask many questions. Enough in fact to require another article to offer my opinion. :-)
While its obvious that fertilizer adds to yield, right now I think producers feel they are getting more out of the cost/value equation in seeds as evidenced by Monsanto's ability to pass on price increases. I offer my opinion on the role of crop prices in the piece.
Sure, macro-economic conditions India are affecting their level of purchases of fertilizer and many other things. A weak domestic currency makes it more expensive to import.
Finally, markets generally follow what they consider hot at the moment. This is a reflection of Wall Streets desire for growth and excitement. That's always been the case.
Thanks again for reading the article and for your comment.
Dydd, thanks for reading the article.
Concerning Capital expenditures and FCF, in paragraph 6 I mention that the companies capital expenditures are winding down as it is related to the increased payout in my opinion. BTW, capital expenditure information is available from most firms’ cash flow statements as well as in its MD & A. My CF model goes back to 2006. I chose to discuss it in a way that in my opinion was relevant to the report.
As for cash flow, in my opinion the FCF of Potash Corp., whether FCFF or FCFE, shows no pattern consistent enough to estimate a growth rate valid enough to make a sensible valuation based on FCF in my opinion. Many like to write about and discuss discounted valuations based on about FCF, dividends, etc. without realizing how sensitive these valuations are to the growth assumption, which is more difficult to quantify than risk in my view. Generally, if in my judgment, I cannot make what I consider a reliable estimate I will not discuss publicly
.
Dydd, thanks again for your comment.
freecookie, thanks for reading the article and for pointing out that oversight.
A correction has been submitted to editorial team. However, this change has no affect on my overall financial analysis or opinion on the stock. Thanks again.
Hello cas448, thanks for reading the article. Yes. In my opinion market risk premiums are very high. Generally, as the broader market rises, so does market risk. Conversely, as market indices fall, risk declines. The current market risk premium is reflective of the fact that in the last 60 months, the S&P 500 has only had a down month 19 times. Since Oct 2011, the index has only declined 6 times on a monthly basis.
Of course there are many measures of risk; one investors assessment can be different than another, which is why I provided a range in my sensitivity analysis. As I state in the article based on recent closing prices market participants, like you I presume, knowingly or not, are pricing in a lower level of risk and a growth rate roughly in line with the companies historical average.
Thanks again for reading the article.
Clearly, a victory for free speech. However, I would like to note how important it is to distinguish fact from opinion. CFA institute standard V-B states that this is a must for both institute members and candidates.
While there is a mix of journalists, investors, and analysts publishing on the platform, the phrase, "in my opinion" can go a long way towards limiting attempted legal action.
Congratulations to both Eli and Seeking Alpha.
Hi Zvi Bar, thanks for reading the article.
I don't think it has ever been a question of survival and I don't think there will be a price war. It's a cyclical business that is currently in a trough. The trough may be a bit extended, which in this case is simply an equal and opposite reaction to nearly per $900 ton potash that burned dealers badly in late 2008/09. Thanks for your comments.
tiger8896, thanks for reading the article. Your assumption about fertilizer demand is incorrect. What price producers expect to receive for their crop impact what they are willing to pay for fertilizer as well as other inputs.
Crop prices will only rise so high before people start using substitutes. As an example, last summer corn, wheat, & soy meal feed became so expensive that some producers started feeding their cattle candy, etc. Smaller ethanol plants closed. Population growth's effect on prices is cancelled out by the amount & combination of foodstuffs substitution available to us at a given time.
Still not a bad cyclical business to have the portfolio in from time to time IMO. Thanks again for reading article.
just a user, thanks for reading the article and for pointing out the missed edit. The SA editors have been given the correction.
As for POT, just remember as the next upswing begins, the fertilizer business is NOT a growth business, it is a CYCLICAL one, subject to the same BOOM & BUST cycles as the grains, cocoa, rice, cotton, etc. markets.
Thanks again for reading and for noting the missed edit.
Cambrian Capitalist, I am not here to defend any stock. I am an analyst that has covered the ag chemicals industry and grains markets for several years offering a opinion and continuing analysis of events. We happen to disagree on a few points; that's what makes a market. Appreciate your comments and thanks for reading the article.
Actually, Monsanto has been a very consistent performer revenue and earning wise in an industry that is subject to boom/bust cycles at times, especially when compared to the more volatile cyclical earnings of the fertilizer companies.
In my opinion management does a very good job of setting expectations. Not sure if market conditions will allow them to see they growth they forecast for 2014. They are a lot more transparent than some others in the industry.
Dupont has one operating segment in the ag chemicals space so no valid comparison exists between the two really. DuPonts industry classification does not put them in the ag chemicals space.Thanks for your comments.
Cambrian Capitalist, not being no #1 in one or more businesses certainly does not make a conglomerate a bad investment.
I'm not knocking DuPont, these are simply common traits among conglomerates. They do tend to lock up rather than unlock value due to the reasons stated above. It has nothing to do with a decision of whether or not to chase margins. That's a strategic decision that can be undertaken by any type of business. Thanks for your comments.
a_partlow, thanks for reading and offering that interesting insight. Saying you are going to get price increase in the next fiscal year and executing on that plan can be two different things. Thanks again for that contribution.
funfun, thanks for reading the article and for your comments.
Its not unusual for conglomerates like DuPont to play second fiddle or worse in many of it businesses. Each business requires different kinds of expertise and that's hard to successfully integrate under one roof.
Thanks again.
Cambrian Capitalist, thanks for reading the article. I did not offer a valuation opinion on Dupont because their agriculture business represents 20% of overall revenues. The company has 13 businesses organized into 8 operating segments. Thus, Dupont's seed business alone is not enough to offer a valuation opinion or a comparison to Monsanto in my view.
Dupont seed business does offer a chance to compare/verify pricing power and costs. I hope this helps. Thanks again for reading the article.
I want to thank everyone for their comments & apologize for not providing any immediate feedback to your various opinions as I was a bit under the weather. I cover the ag chemicals industry and grains markets and have for more than 4 years. I look forward to your future comments.
Rhianni32, thanks for reading the article. As originally stated above, If you can't see that the ending inventory chart provided by Potash Corp illustrates that inventories are higher both year over year and of the 5 year avg. then I don't know how to be any clearer. Thanks for reading the article and sorry for the delayed response.
MMM76, thanks for reading the article. If you can't see that the ending inventory chart provided by Potash Corp illustrates then I don't know how to be any clearer. Thanks for reading the article and sorry for the delayed response.
stocks3066, thanks for reading the article. As the disclosure states, I have no position in any stock mentioned in this article. I cover the ag chemicals and grains market. Thanks again for reading the article.
SBCapital,
Your POV makes a certain assumptions about the proposed sale of the 22% stake that I don't share. But even if we assume that any such sale will cause those two companies to agree to operate Joint Venture again, it still does not deal with the farm economics based crop prices that will almost certainly be lower a couple of months from now.
As with any cyclical business, cycle will eventually recover and upswing, I just happen to think it will take more than the exchange of a few shares before it happens. Thanks again. I appreciate your contribution.
SBCapital, thanks for reading the article. Yes high volatility is there on the up & downside for IPI, which is one of the reasons I prefer the larger producers (lower downside risk).
Your point regarding the plant capacity/productivity upgrades are also well taken. However, expanded production capacity / productivity does not have nearly the impact that price & volume do on gross margins.
After potash prices trough (after crop prices their bottom) and a new cyclical upswing begins those plant upgrades will help margins look better. Thanks again for reading the article.