groty

Potash: Thesis versus Reality Yet Again

To me, I interpret the pricing news from K&S as very bearish because it virtually guarantees the China and India contracts will be negotiated at less than the $750/ton price the producers have desperately tried to defend since last year by repeatedly cutting production. If true, then 2009 and 2010 earnings estimates are probably still too higher.

And yet the momentum guys come out gunning the stocks higher at the open again today. I don't think there's anything that can shake their desire to own these names for the nex 3-4 years......until new mines come online and create excess capacity.

Potash Continues to Shake off Bad News

They've convinced the analysts that the inventory overhang will be worked off by 1Q and that production cuts will keep pricing from deteriorating further. You can see the analysts have bought into it by looking at 2Q and full year estimates.

I continue to think MOS and POT management are going to concede on the 1Q earnings call that they've been too optimistic about the rebound. The question is, are investors already pricing in a disappointing 2Q and full year 2009 and they're willing to own the stock at current levels in anticipation of a strong 2010 and beyond.

I obviously don't know the answer. I'm hoping for a flush after 1Q earnings are announced so I can buy the stock much cheaper, but the fact the stock is so reslient in the face of bad news makes me think I may not get that opportunity.

Potash Stocks Sinking on Uralkali News

Seems like alot more downside risk than upside potential until after 1Q earnings are announced.

The MOS CEO said warehouses and distribution centers are packed with excess inventory, so 1Q shipment volumes are probably going to come in lighter than the analysts have modeled. Now factor in price declines in Brazil, and 1Q estimate are amost certainly still too high and have to come down more.

I want to own the stock for 2010 and beyond, but I think there's more downside to come. I know Doyle thinks the inventory overhang will be worked off after 1Q or 2Q at the latest, so he's expecting a very robust second half. Its been my experience that CEOs generally underestimate how long it takes to work off excess channel inventory. I hope Doyle is right, we'll see.

Good luck. I'm going to wait for more color on the 1Q conference calls before jumping in.

Mosaic: Cargill Rumors Heat It Up

Any idea what caused the 15% selloff lat Monday (2/23/09)? It was a huge volume day, almost the mirror image of Friday's big gain.

I've been searching for any kind of news, and the only thing I can find is the CEO saying warehouses are packed with fertilzer bought last fall as farmers postponed their buy decisions until planting this spring hoping fertilziers prices will come down. But he made those comments the prior week and the stock really didn't move much on those comments, so I'm not sure if that's the reason for the big selloff on Monday.

Stocks just don't decline 15% in a day on 2x average volume without a catalyst, but I don't know what it was.

Any info you can provide is appreciated. Thanks.

Insulet Corporation Not Yet an Attractive Short Opportunity

Insulet's pre-IPO funding came in part from Sam Islay (personally) and through his fund, Orbimed. It's noteworthy that neither Sam nor Orbimed sold any stock in the IPO, nor did they sell after the restrictions placed on insiders from selling within 180 days after the IPO expired. Sam and/or Orbimed actually started increasing their stakes when the stock slid into single digits last fall.

Pequot was also a major pre-IPO investor. However, Pequot did sell some of its stock in the IPO. While I agree 100% with your funding concerns, either Orbimed or Pequot could rescue PODD with follow on investments if the captial markets are closed to PODD when the funding is needed. Of course, that will depend on PODD continuing to track to projections and the competitive landscape. A private Israeli company, Medingo, is very close to coming to market with a diabetes "patch" device that will compete with PODD, so you have to watch closely how its product is received in the marketplace.

I've been following PODD since the S-1 filing, listening to probably 75% of all the earnings and investor related conference calls and reviewing all the 10Qs, etc. So far, they've pretty much executed how they told investors to expect they would, with a couple of blips

They've really got a very attractive business model if they can scale it to profitability before the competive environment materially changes. Each patient requires approximately 10 pods per month, so you're looking at an annuity like recurring revenue stream paid by third party payers like insurers and HMOs. But until PODD reaches profitability, you have to worry about a big breakthrough in diabetes pharmceuticals, and/or superior delivery devices coming to market. I doubt Medtronic is sitting idly by waiting for PODD to render its pumps obsolete. And there's also the question you bring up about funding.

For those reasons, I continue to montior PODD's progress, but I haven't made an investment yet.

Adding Some Potash after Goldman Downgrade

Corn inventories remain near record lows. If farmers ultimately decide to shift more production to soybeans from corn next spring, that will set corn up for a nice bull run when traders start discounting a reduced 2009 harvest, which will be bullish for fertilzer in 2010. Even if the global economy is very weak in 2009, ag commodity prices are not nearly as economically sensitive as industrial commodities are. From a macro perspective, ag commodities are far more sensitive to population growth.

The fertilizer guys were unbelieveably rational about capacity expansion when fertilizer pirces went parabolic beginning in late 2007 through this past summer. That means there's not a huge amount of excess supply about to come online as happened when the fertilizer cycle went bust in the late 1990s, causing fertilizer prices to collapse. Fertilizer prices are down, but they are not going to collapse, and that's probably the most important reason why I believe the weakness will be a relatively short lived. I believe it will make sense to get very bullish on fertilzers again in early 2009.

But timing is everything.

A Short Update on My Four Short Ideas

SR9:

Go to the section (usually) labeled: "Events of Default" of any corporate loan agreement. They are often filed as exhibits to 8-Ks, 10-Qs, and 10-Ks.

Lots of things can trigger an Event of Default. Not making timely payments of interest and principal as agreed is certainly one, but there are many others.

Buy, Sell or Hold: What to Do with Potash Corp.?

Excellent post.

With corn prices down over $2/bushel in less than two months, it's unreasonable to expect additonal potash prices will stick after quadrupeling to $1000/ton in two years.

'09 earnings will be close to 100% greater than full year '08 earnings, but if investors perceive the pricing cycle has peaked, the stock's long advance is over.

I believe rallies in POT should be sold.

The 2008 Share Repurchase Program At Potash Corp. (Part VI)

There are restrictions about when and how much stock management can buy in the open market under a corporate buyback program.

For example, I know they can't be the opening print and I know they can't buy during the last half hour of trading. They can't "take offers" and drive the price higher. They have to place bids below whatever the current best bid is at any given point in time.

There's also a daily volume restriction. I think its 25% of the average trading volume, but I can't remember over what period the average is calculated. It's been a long time since I learned the rules, so the rules may have changed over time or my memory may not be accurate.

But using your 11 million average figure, management could have only bought back 25%*11million = 2.75 million shares.

The 2008 Share Repurchase Program At Potash Corp. (Part VI)

Per footnote #3 of today's presss release, management spent about $1.5 billion buying back almost 7.5 millions shares at an average price of $203.30 per share during the quarter.

Yet "the market" sold the stock down to the $190 area even though they knew management thought $203.30 represented a good use of shareholder capital.

Somebody is obviously wrong.

I have to say, I can't ever recall seeing investors willing to sell so far below the average buyback price so soon after a quarter ended. It seems irrational, but we'll only know in hindsight if the sellers at $190 and below were irrational or if it is management who was irrational for buying at $203.30.

The 2008 Share Repurchase Program At Potash Corp. (Part VI)

There are numerous examples of companies that spent $billions on share buybacks over the years but ultimately filed for bankruptcy. Delta Airlines is a good example. Two years before they filed they bought back stock in the $40/per share area. After they filed, the stock was worthless.

If Delta had all the $billions they spent on share buybacks, maybe they could have avoided bankruptcy. I'm not saying they would have avoided bankruptcy if they hadn't spent all that money on share buybacks, I'm just raising the possibility.

Share buybacks are an easy way to increase EPS and ROE, but they can also be an easy way for management to squander shareholder's capital and benefit only the select few who sold their stock back to the company.

Potash Heats Up: $1000 a Tonne?

To Think About it:

You asked:

"But what if the price holds for a while, plus or minus 10 - 15%? Won't that turn POT into a nice fat cash cow and they can use it to expand opperations leading to greater future volume & possibly gain market share (assuming management finds acceptable deals)?

Or they could pay out heafty dividends which would support the stock price to some extent."

All true. But once pricing moves as far above marginal cost as potash is now, the rational response is for producers to eagerly bring new capacity online as soon as possible. It takes years to bring new greenfield mines online, but once the consensus is overwhelming convinced pricing has peaked, I'd expect the stock will start a slow stready grinding down. That's been my experience with how cyclicals trade.

'09 estimates for POT have already doubled in the past 90 days. AFTER those estimates were raised, the sell side is now falling all over themselves to increase their price targets and ratings on the stock.

I don't like it. I'm very cautious.

If pricing hasn't peaked, then some hedge funds will sniff it out within the next few weeks and start buying again. I'll wait for the market action to tell me it's time to get long again.

Potash Heats Up: $1000 a Tonne?

I was with a bank that participated in a loan to TRA during the last cyclical fertilizer boom. The boom very quickly turned to bust, and TRA came very close to having to file for bankruptcy after fertilizer pricing collapsed. The stock traded down to about $1.

So, the point is that the minute the pricing cycle peaks, the stock will become toxic even though earnings won't peak for a few quarters after the pricing peak because price increases go into effect with a lag.

The stock sells off after every price increase is announced because people want to believe pricing just can't go any higher.

Is $1000/ton peak pricing? That is the only relevant question.

Steel, Coal and Agriculture Plays Turning Over

Inlfation is out of control in many fast growing countries. Most of the world's central banks (except the FED) are responding by tightening. IN some cases, pretty aggressively. For example Brazil's central bank recently raised overnight lending rates to 12.25%. China has been raisig interest rates, increasing reserve requirements and allowing its currency to strengthen for several months to try to get a handle on inflation and still haven't been successful.

The point is, with central banks tightening, I think investors are starting to discount a synchronized global slowdown. All the high fliers mentioned are economically senstive, so they are getting wacked. If a sharp global slowdown does materialize, those stocks will be toxic even though they look "cheap" on '09 earnings estimates.

The Mosaic Co. Added to Goldman's Conviction Buy List

Looking at trailing earnings and cash flow makes no sense. These are high fixed costs businesses. That means they have high operating leverage, so changes in product prices (either up or down) have a magnifying effect on earnings. Potash prices have been skyrocketing, going up every month this year, so 2008 earnings aren't comparable to 2007.

POT is trading at 13x the current consensus earnings estimates for 2009. But potash pricing keeps going up, and will continue to do so, so those '09 estimates are too low. I know potash prices are going to continue to go up because potash pricing has tripled within two years and POT still has to "allocate" product to customers. In other words, there's not enough of the stuff even at these elevated prices to meet demand. It takes 5-7 years to bring a new potash mine online, so there's going to be limited new supply for quite some time. But make no mistake, these stocks will crater hard when investors start to worry about new capacity coming online. But that isn't a threat for quite some time.

It's no bubble. Fundamentals are driving phenomenal earnings growth. As earnings estimates keep getting revised upward, the stock price will follow.

Goldman has it right.