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Is This Right
16 Comments
Pacific Ethanol: Market Growth and Increase in Production to the Rescue
On Oct 2nd at an Oppenheimer Investment event, PEIX CEO stated that although they have increased prodcution, sales volume will be approx 50/50% in-house vs resales production.
So, just to correct point # 2 above, resales group is growing as fast as the new plant coming online in 2Q and 3Q... Good news that local markets are absorbing both production and resales gallons coming across from other companies.
Big Blue's Stock May Be Affected by IBM's 'Bank'
In the case of 'IBM Banks', let's ask a few questions.
- Do they take get their high margins by borrowing and lend it out at a interest rates? From this they get 46% on the money? In my world, this is a corner loan - called loan shark! Since the company has best high-grade customers, I doubt that these customers are dummies. So my deduction is that this not how 'IBM Bank' earns this High money.
- What else does the 'IBM Bank' do as a business that could account for the high margin? OH, they lend money to customers doing mission-critical services... And that part of the business is growing ( like relieving traffic jam, or placing 100's of operating banks in China...). So by financing the customer's expense for these services, the bank earns more.
Yeah, this is good but still does not account for 46% margin.
-What else do they do to be so good? Ah, the 'IBM Banks' are "USED CAR SALESMEN" ( oops used computer salesmen) around the world.
Imagine being IBM Banks as owner of oops 3-4-5 year big and mid-size computers, kept in a pristine corporate computer centers. Due to efficiency or growth, the first user of these computers want to upgrade. Then the 'owner' of the computer has to take back the 'used computer' still in great operating conditions. By reselling the same computer to someone else who is in dire need for that size computer and making a profit. It is like leasing the best Benz, take it back and resell it at high-value! Ah, that part of the used car ( oops used computer) can have a high margin since the profit on the sale when added to the fact that two sales are made (1 sale to the 1st customer for a newer model and a sale to a 2nd buyer).
Ok, now we can understand that a bank is a bank and a 'used car' sales operation( oops IBM Bank is a bank and 'used computer' sales operation). As a seperate financial unit, due to accounting law, these used-computer sales are not reported in brand sales, but are reported as income in the finance unit. Oops, the cost of the used-computer is the trade-in cost which was established 3-4 years ago! In a conservative bank, Interest money was earned on the original equipment and part of that earning in the past 3-4 years was set aside as a risk mitigation ( in case the trade-in value is less than the resell price). But if the used-equipment sales keep rolling forward, the abl keeps making profits.
Now does the fear about the sub-prime sludge the same as the IBM Bank prospects? You tell me. Oh by the way, in an economic slowdown but a lot more companies might consider used equipments rather than buying new, the margins on the used computers go higher!
The trick is to slow down the expenses on new mnfg to match demand... not to slow the bank who has equipment with higher margin for sale!
This is why a high-level GRADE is assigned to the IBM Bank bonds.
How the U.S. Saved Europe's Banking System
thank you for the comprehensive data on the european banks.
Any such insights of comparative info on US and AP banks?
Why I'm Selling Pacific Ethanol
Funny, ...my second comment is that you made your observation right around when they announce that they have COMPLETED their construction of 4 plants and now have reached the 220billion gallons capacity that they had as a goal for the company. Last celebration opening day on Oct 10.
Verasun's Screw Up
Like you, I had judged their 'operating' skills in merging two companies, building bulk supply to be able to optimize distribution thru unit trains, and becoming efficient with low volume production (355 million gallons per quarter).
Hopefully, they will step away from the casino table, rather than raising the ante by more bets- by their own filings, 4Q will also be similar impacted.
It will take sometime to work thru this as they have just added $.70/gallon to the cost of their plants( $100M lost over 1.4B gallon production). At 10% interest, this is a 7c cost to every gallon of ethanol that they sell until they can repay this debt.
I think that they have just made themselves a take-over candidate. May be someone will value their plants at $2.50 per gallon? ADM, or an oil company like BP to the rescue?
Are We at the Bottom of the Ethanol Barrel?
However, the bounce in these ethanol stocks can be best understood this way:
1/ In a "credit crunch" environment, the "squeeze" came from the speculators trying to trap the companies while their cash flow is constrained. The constraints are from the construction obligations and lately the price of corn.
NOW, since PEIX has shown that a) they can generate cash (EBITDA $12M) even at the high price of corn b) they are at the end of their construction plans (3Q08) and c) they finally have a CFO who can look under all the rocks of the financial contracts.... for all these facts, now Wall St can start pricing the stock on its relative value to oil/gas, without the 'squeeze' from the SHORT speculators.
Incidentally, except for ADM who has a lot of cash, most ethanol CORN plant construction will be done by 2008!!! The scarce about corn will be over soon.
Pacific Ethanol: 'Build-Ahead' is a Manufacturing Strategy
Plus today, we learn that 1 of their plant had a few down days. This did not stop PEIX from showing 'better-than-expected' results, in a higher corn price environment.
My next prediction ( give it 60 days) is lower corn price - due mainly to WW supply from poorer countries around the world. An ear of corn is an ear of corn, when fed to the sows.
It's Now 'Official': Ethanol Is a Scam
What is your alternative plan, Mr Perry, PH.D?
AMD Product Ramp-up and New Factory Plan: What Gives?
Pacific Ethanol Anticipates a Gloomy Q4
1/ Oregon was to come online in 1Q08 ( law was passed, plant was built...). So PEIX started puttin in storage in Oregon enough ethanol to serve a BRAND NEW MARKET. So their business incurred the cost of buying the corn, operating the plant and not getting the revenue until the grand opening of the market. This only happens once. And it is a GOOD THING.
2/ Since ethanol price in 1Q08 is higher than 4Q07, even if there was no new market, would you not like to hold back on $1.97/gallon and sell 3 months later for $2.20-$2.30/ gallon?
Come'on... everyone jumps on 4Q07 numbers without a single thought about market condition in 1Q08.
By the way, PEIX is not driving the U.S. SouthEast market supply. But other companies, with their eyes on FL, NC... will have to do the same thing ( build-ahead) in order to develop these NEW markets.
The Case Against Ethanol
Ethanol ( as of 3/26 noon) is at $2.47 while corn is at $5.48.
A price difference of $3 versus $4 is a LOT.
Now for the other facts:
1/ "The corn used for ethanol could be used for feeding the poor" Question is : would the corn be grown at all if there is no ethanol sales to supplement oil-based gas?
2/ "Ethanol uses as much energy as the coal, oil and natural gas that it takes to make the ethanol".
Question is : why is it we do not turn coal or natural gas into gas?
So taking coal or natural gas energy and CONVERTING it to fuel to put in a car is ingenious!
3/ "The cost of subsidies pf $1-$1.38...'
a) My understanding is that the CORN ethanol subsidy is 50c a gallon. It goes to the REFINERS to kick start their investments to build the infrastructure to store/mix/distribute ethanol. Now this infrastructure is partly USABLE for cellulosic ethanol in the future.
b) the $1-$1.38 is to have the ethanol industry do the research/development/b... new plants for ethanol which will not depend on corn.
So first the author of the article blames the use of corn, then votes again approach to develop ethanol with other than corn.
OK, let's hear your POSITIVE proposal on how to solve the energy challenge. I will start first : I am all for conservation=driving less, buy smaller cars. Any other ideas to burn LESS OIL BASED GAS?
Pacific Ethanol: Juicy Details From Tuesday's 10-K
A more subdue view of the status from the 10K reading:
1/ how come a plant which is producing ethanol is not fully completed? Seems like a trap was set for PEIX long ago and thru Lyles making a loan, PEIX was able to bridge to 2Q08. But yet had to break a few eggs ( eight euro loans instead of seven sounds like a trip wire that went boom!)
2/ $14M of loss in 4Q : since 6.6M is due previously Dec announced Madera plant delay- 4rd plant in construction and due to interest protection ( IF interest goes up on $170M debt, they are protected) so roughly there is another approx $8M of loss . read on…
3/ My guess ( again a guess) is that PEIX had to write down some of its inventory ( about 15m gallon by some 18c/gal ( $2.11 in 3Q to $1.97) so that is about $3M of the 8M… They got a higher price / gal than the industry ( good marketing and RISK MANAGEMENT)...read on
4/ Whatever else they produced and put in storage in 4Q might have cost them another $5-6M of cost without revenue.
Between # 3 and #4 the loss was about $8M.
when added to Number #2 this account for $14M.
NOW for the positive side of the 10K!!!
1/ THEY HAD TO PRODUCE AHEAD OF 1Q06 so they could stock pile for Oregon. That is called build-ahead!! Mr Greenberg, do you know that buil-ahead is an actual STRATEGY in manufacturing?
2/ Since they assume the risk of producing and storage, we know NOW in March 08 that the ethanol gal was selling for $2.2 to $2.30!!! (higher than the $1.97 price in 4Q). So what if their margins was lower for the 4Q period when they had to overproduce in order to build a whole new market in Oregon. I would have like to hear Mr Greenberg if the Oregon market was open for business, or Florida, or NC and they was no stockpiling ahead of time. Be real when you see a loss figure, Mr Greenberg. The number for a growing business is EASILY FORGIVEN IF IT IS AN INVESTMENT TURNED INTO CASH WITHIN 6 MONTHS. How shortsighted we become on Wall St where we go to bed on Friday and wake up on Monday witha whoops… I did it again(by Britney)!
3/ Lyles LLC agrees to buy 3M warrants to buy the shares at $7 per share at any time. AND paid for these warrants in advance. As an outsider looking in, I will take the same bet.
Mr Greenberg, you would never be able to really get your hands durty with dirt, corn, steel, trucks, pumps… You can only read a 10K
Ethanol: Three Developments to Watch
Larry Kumins: Ethanol Use May Peak Soon
Why is it doubtful that the car industry and the consumer will not accept E85?
Housing Risk Factor: Keep an Eye out for December Data
1/ HOV showed data that as homebuilder they had substantially decreased their prices ALREADY and existing Home sellers are the laggards in adjusting prices. This input says that new home buyers will buy the comparative value inherent of in new homes. So the HB will be able to liquidate their inventory EVEN if the market rate of sales stays low. The HB just have to stop acquiring or developping NEW LOTS. Lots are abouit 25% of the fixec cost of the homes.
50% is variable cost ( building the home) and the balance is interest on debts and profits.
2/ in 4Q07 KBH sold for $2B worth of homes from inventory. An analyst complimented KBH for this level of sales from inventory. The reading there is that this sales level, eventhough lower than yty by $1B, it is still a higher level of sales than the analyst expectation.
My call: the HB are making bottom here. The duration of the bottom flat curve line is what we should start observing in 1H08 and not expect a V type recovery. But at least some 'rational value' should be assigned to these companies.