The Daily Kill Sheet Picking Off Profits One Stock At A Time!

January 27, 2012

Daily Kill Sheet For January 27th 2012

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Take a look at Carbo Ceramics (CRR$104.01) for a trade. The company reported fourth-quarter earnings yesterday $0.28 below the consensus estimate and the stock was hammered for over 20% of its value. While the company did miss estimates handily on both the top and bottom line, the sell off was a bit overdone, in my opinion, and the stock now offers compelling value at the current quote.

Although the size of the EPS miss shocked investors, there were some bright spots within the release. To start, revenues were up over 32% on a year over year basis while EPS jumped nearly 59%. North American proppant sales volume increased 16% while international proppant sales volume jumped 21% on a year over year basis. Operating profit for the fourth quarter of 2011 increased 59% versus last year.The increase was primarily due to higher proppant sales volume, an increase in the average proppant selling price and a higher contribution from the company’s other business units partially offset by an increase in freight and logistics costs. Net income for the fourth quarter of 2011 also increased 59%.


Operationally, both the gross margin and the operating margin were still headed in the right direction as well. Indeed, the gross margin jumped 220 basis points on a year-over-year basis, while the operating margin surged 520 basis points. Overall, the miss versus expectations was driven by the unseasonably warm winter weather we have been experiencing. The warm weather lead to a severe decline in natural gas prices in the quarter which drove E&P;’s to reduce capital spending in natural gas basins and increase capital spending towards liquids-rich basins. The largest impact associated with this shift in capital spending was the reduction of approximately 70% in their Haynesville proppant sales volume from the third quarter of 2011. While sales volume dropped off in the Haynesville region, an area rich in natural gas, growth in the liquid-rich plays and international markets picked up and created logistical issues within the industry. These logistical issues burdened CRR’s distribution network and lead to the miss versus expectations.


Carbo has taken a number of steps to rectify the situation by accelerating several distribution infrastructure investments including rail car additions, and increasing storage capacity in the key unconventional plays they serve. Management noted that as frac jobs have increased in size and intensity common issues such as weather, equipment delays, et cetera, can result in increased variability in proppant sales volumes. Accordingly, serving clients on a just in time basis has become more challenging. All said, management believes that  the investments they are making now in their distribution model will aid in managing this variability and capturing more opportunities for them in the future.


At this point CRR shares are trading at 13.7x the consensus estimate and 14.9x my $7 estimate. Given the size of yesterday’s miss, I have cut back my estimate accordingly. Even so, the shares are now trading near the low end of their historical P/E range and likely offer solid upside to patient investors. On a technical basis, the stock closed with a gravestone doji, which typically signals a reversal pattern when found at the bottom of a large decline. Volume was above average yesterday and I believe that many traders who had gotten into the stock ahead of earnings for a quick trade are now out. Three of my favorite technical indicators, the TRIX, Elder Ray and Williams %R ratio are all signalling that long positions can be initiated near current levels. (Note that the Williams %R actually signals that the stock is near-term oversold, while the other two indicators are signalling about the near-term trading opportunity.) With that said, my near-term price target is $118, implying about 13.4% upside to my target. 

 

January 26, 2012

Daily Kill Sheet For January 26th 2012

Filed under: Uncategorized — Administrator @ 9:23 am
Potash has reported fourth-quarter earnings of $0.78 a share, $0.10 worse than the consensus estimate.
Revenues rose 2.9% year over year to $1.87 billion versus the $2.08 billion consensus revenue estimate.
Management stated that “A typical seasonal slowdown in global fertilizer demand during the fourth quarter was exacerbated by near-term macroeconomic uncertainty. As phosphate and nitrogen fertilizer prices declined significantly late in the quarter from previously established annual highs, buyers of all three nutrients paused to assess market conditions before positioning product ahead of the upcoming planting season in key growing regions.”
A significant portion of shipments for the quarter fulfilled previously committed contract volumes with China and India. In North America, dealers worked from existing inventories to meet immediate needs, which resulted in fourth-quarter movement from North American producers falling well below the comparative period in 2010. While pricing remained relatively stable in most major markets, the North American market pulled back slightly on weak demand and increased pressure from record offshore imports.
Similar conditions affected phosphate and nitrogen markets. Shipments of solid phosphate fertilizer from North American producers and US demand for urea and ammonia products slowed during the quarter from the same period in 2010. While strong agricultural fundamentals and tighter global supply pushed up prices through the first nine months of 2011, weaker demand during the fourth quarter led phosphate and nitrogen benchmark prices to decline from previous highs earlier in the year.
Pricing
Potash – Average realized price of $431 per tonne for the fourth quarter was $108 per tonne higher than in the same period of 2010, but declined from the trailing quarter.
Phosphate – Despite the softening of spot markets during the fourth quarter, average realized phosphate prices of $631 per tonne remained well above those in the fourth quarter of 2010.
Sales volumes for the fourth quarter totaled 0.9 million tonnes, down from the 1 million tonnes sold in the same period of 2010. Slower demand for solid fertilizer products was partially offset by stable volumes in other product lines.
Nitrogen – While key benchmark prices declined by the end of the quarter, the average realized nitrogen price of $461 per tonne remained well above that of fourth-quarter 2010. Strong industrial and agricultural demand paired with tight product supplies through much of the year led to higher prices across all nitrogen products relative to the same period in 2010.
Guidance
For the first quarter, the company is guiding earnings to a range of $0.55 – $0.75. The consensus stands at $0.83.
For the full year, the company is guiding earnings to a range of $3.40 – $4.00. The consensus stands at $3.90.
Global potash shipments for 2011 are estimated at ~55 million tonnes, marking the second consecutive year of significant growth. While the majority of demand occurred in the first nine months of 2011, fertilizer applications are believed to have remained robust throughout the year, even when dealer purchasing slowed in the fourth quarter. We view the current year as the reverse of 2011, which started quickly but ended with weakened demand. Restocking of distributor inventories ahead of major application seasons has yet to begin in earnest, but is expected to accelerate as buyers move more a
ggressively to secure product to meet farmers’ demands. Although the lull in purchasing for the new year has resulted in lower estimates of annual global shipments, we still see potential for a record year in 2012, with shipments estimated to be in the range of 55-58 million tonnes. In North America, the current cautious approach of dealers managing their potash inventories is expected to keep shipments for the first quarter below those of the opening quarter of 2011. Given supportive crop economics and the prospect of record corn and soybean plantings, management anticipates demand will strengthen as the year progresses, with total shipments in the range of 9.5-10 million tonnes for 2012.
In North America, the current cautious approach of dealers managing their potash inventories is expected to keep shipments for the first quarter below those of the opening quarter of 2011. Given supportive crop economics and the prospect of record corn and soybean plantings, the company believes that demand will strengthen as the year progresses, with total shipments in the range of 9.5-10 million tonnes for 2012.  
Latin America is expected to remain a region of strength, following a year of record fertilizer imports by Brazil that included an estimated 7.5 million tonnes of potash. The company believes that buyers in this region will engage more aggressively by late in the first quarter, with rising farmer demand fueled by increasing acreage and strong crop economics for soybeans, corn and sugar cane. POT expects shipments to Latin America will be 10-10.5 million tonnes in 2012, potentially surpassing 2011 record levels.
Countries in other Asian markets slowed potash purchases in the fourth quarter after record shipments during the first nine months of 2011, but demand is expected to pick up more significantly by the end of this quarter. Prices for palm oil, produced from potash-intensive oil palm, remain at high levels over concerns around tight supply. This, along with healthy returns for other key crops grown in this region, is expected to support robust demand throughout 2012. Shipments for the year are estimated to be 8-8.5 million tonnes, similar to levels achieved in 2011. 
Following the completion of Canpotex shipments to China in fourth-quarter 2011, preliminary discussions have begun on a new supply contract for the first half of 2012. With inventories estimated at normal levels, management believes Canpotex negotiations should not be unduly prolonged. They anticipate China’s 2012 consumption will be in the range of 10.5-11 million tonnes, including imports of approximately 6.5 million tonnes.
In regards to India, management thinks that near-term demand is likely to face similar challenges to those presented in 2011. Uncertainty over government subsidy levels, a weakened rupee, higher retail potash prices and congestion at port facilities could limit near-term growth in this market. Canpotex shipments are expected to continue based on previously contracted volumes and pricing agreed to through first-quarter 2012, although deliveries will now likely carry over into the second quarter. For 2012, they believe that total shipments to India will be in the range of 4-5 million tonnes. 
All said, I continue to hold my long position here. Investors have been anticipating a potential miss for POT for some time now as well as slowing in India due to subsidy cuts. Overall, management remains bullish on the outlook for 2012, although they expect the year to be back-end loaded. At only 12x the midpoint of POT’s full-year guidance, the stock is not overly expensive here.  Over the past 19 years the stock has averaged a P/E of 25.5x while trading at a 52-week high and averaged 14.3x at a 52-week low. The stock is currently trading at 12.0x the midpoint of the company’s new guidance. On this basis, the stock would need to trade to nearly $53 to trade at the average P/E while at a 52-week low. While it’s true that an average has multiples both above and below that average, the outlook for food production going forward and hence fertilizer demand remains constructive, thus I believe the stock’s multiple will ultimately expand from the current depressed level. With that said, I reiterate my Buy on POT shares.  

January 19, 2012

Daily Kill Sheet For January 19th 2012

Filed under: Uncategorized — Administrator @ 10:13 am

I am closing out my 12/2/11 Trading Buy on Macy’s Inc. (M $35.86) with an 11.5% gain. I am also closing out my 1/10/12 Trading Buy on Abercrombie & Fitch (ANF, $47.54) with a 4.2% gain.

For Macy’s, the stock has had a good run and is now nearing the price targets of four sell-side analysts. Sell-side price targets are decision points for the analysts as they need to decide whether to raise the price target or downgrade the stock. Given we have had a quick double-digit gain I am selling to protect those trading profits here and I will look to re-enter the stock at some point in the future if volatility allows us another good entry point. I believe it will. The four brokers that Macy’s is approaching price targets for are: BMO Capital, Credit Suisse, Deutsche Bank, and JP Morgan.

For Abercrombie & Fitch, the catalyst for our trade has now passed and the stock has moved up accordingly. Thus we will take our profit here and avoid earnings risk due to the political and financial concerns revolving around Europe. Remember, ANF had a strong run up due to investor optimism about the company’s move into European markets. That move has since come back to bite them in the ass and I think the best move is to go to the sidelines here until the dust settles in Europe.

January 17, 2012

Daily Kill Sheet For January 17th, 2012

Filed under: Uncategorized — Administrator @ 9:21 am

Take a look at Potash Corp. (POT, 44.74) for a trade. Note that the stock was upgraded this morning at CIBC from Sector Perform to Outperform, thus the stock will likely pop at the open. With that said, let’s try to limit our buy-in price to $47 or below.

There are two things driving  my recommendation here. First, the stock broke through resistance at its 50-day moving average on Wednesday last week but didn’t have a strong enough close above the line to make me comfortable that the resistance had now become support. The S&A; Resource Report threw a Buy on the stock on Friday, though, and that gave the stock enough of a bump to give it a solid close above the resistance. The next major resistance for the stock is its 200-day moving average. While there are some price points where the stock hit resistance in the past between Friday’s close and the 200-day moving average, all of these price points had been below the 50-day moving average at the time and it’s clear that the true resistance was the 50-day moving average and not the particular price point. With that said, my near-term price target is $51, $0.26 below the 200-day moving average. My target implies a 13.9% return from Friday’s close or an 8.5% return from my buy up to price.

On a fundamental basis, it’s hard to complain about the company. POT has the highest operating margin of all of the fertilizer stocks and the price for its key product (potash) has been rising. While the company is already the world’s largest producer of Potash, an expansion program due for completion in 2015 is expected to double the output of its Rocanville mine to about 6 million tons. Currently, POT is the largest producer in the world and holds about 20% market share.

All said, the stock is volatile and trades off of agricultural news such as crop reports and import/export numbers for fertilizer. At this point momentum is turning in POT’s favor. Three brokers have upgraded the stock over the past two months and the stock barely flinched off of Thursday’s weaker-than-expected crop report. Given the momentum behind the stock, POT could work to help hedge our short position in AGCO.

January 11, 2012

Daily Kill Sheet For January 11th 2012

Filed under: Uncategorized — Administrator @ 9:23 am

Take a look at AGCO Corp (AGCO, $49.84) on the short side. The stock closed last night with a bearish doji star, which is a reversal pattern. The stock has been driven higher over the past month due to two factors. First, the company held an analyst day in early December where they raised EPS guidance for 2012. Even so, the main reason for the guide up was an increase in synergy expectations from a recent acquisition (GSI) from about $0.30 a share to $0.45. All said, the company’s full-year 2012 guidance was for $5.00 a share while the consensus had stood at $4.65.

The second reason for the recent strength was a rumor that has been making the rounds that Caterpillar might be interested in buying the company. As far as I can tell this rumor started in early January and I could not find the source of it. Naturally, a bid by CAT would drive the shares higher, however ag has not been a focus of CAT in the past, and a cycle bottom would seem like a better time to try and buy into the sector rather than near the peak in an uncertain economic environment. Note too, that CAT sold its struggling Challenger tractor business to AGCO in 2002 and has an agreement in place with AGCO to allow the company to sell through its dealer network. Given that a lot of CAT’s dealer network is tied to industrial sales it’s no surprise that AGCO’s U.S. market share remains low. Thus, I don’t give a lot of credence to the rumor.

On a fundamental basis, prospects are a mixed bag. While the company did just raise its earnings guidance for 2012, citing synergies from a recent acquisition and improving prospects from the emerging markets, investors need to keep in mind that over half of the company’s sales are generated in Europe, while an additional 20%+ comes from North American markets. Indeed, swings in the euro can have a large impact on share net. The company’s recent guidance assumes a $1.35 euro, but the most recent euro/dollar quote is $1.27. In the past the company has stated that every $0.05 move in the euro/dollar value has about a $0.10 impact on share net. The the recent drop could cause their guidance to now be about $0.16 higher than what it would be if the value of the euro remains near current levels. Given the banking and political problems in the eurozone, I wouldn’t bet on a sustainable rise in the euro just yet.

A second fundamental issue that bothers me is that AGCO had a strong year in U.S. sales last year that was likely driven by a bonus depreciation program in the states, thus some of last year’s sales were likely pulled forward from this year. All said, AGCO is not a strong competitor in the U.S. and Deere, the market leader, is not afraid to compete on price. In addition, Deere has been moving aggressively to gain share in Brazil, a key South American market for AGCO. With that said, margins could come under pressure in this key market at a time when the world’s economic outlook is uncertain.

On a technical basis, Three of my favorite technical indicators are also lining up to give the stock a near-term bearish underpinning.  The TRIX indicator is poised to do a bearish crossover and is sitting near an unsustainable level. Meanwhile, the Williams %R ratio suggests that the stock is overbought here and has already started to rollover. Finally, the Elder Ray ratio is also suggesting that short trades can be safely entered near the current quote. All said, my near-term target is $45, implying a 10.7% return to my target.


January 10, 2012

Daily Kill Sheet For January 10th, 2012

Filed under: Uncategorized — Administrator @ 9:10 am

Take a look at Abercrombie & Fitch for a quick speculative trade heading into the ICR Conference, which starts tomorrow in Miami Florida. Although ANF will not be presenting at the conference a number of its peers will, and the likely flurry of press releases surrounding the conference could spark some interest in Abercrombie shares. Indeed, a number of the presenting companies at the conference have already issued press releases including: LULU, GCO, LIZ, SIG, JNY, DSW and BJRI. Remember, we are not looking to marry the stock here, just take advantage of potential volatility surrounding the conference presentations.

On a technical basis, the stock is looking washed out here. The stock closed with a bullish piercing line reversal pattern yesterday even though FBR Capital lowered its earnings estimate for the stock to $0.13 below the consensus estimate and Brean Murray downgraded the stock  from Buy to Hold. The Brean Murray analyst also lowered her estimate to $0.42 below consensus. To say the Street is expecting ANF to miss the consensus is an understatement. Still, the stock closed the day up 1.6% and could be poised to rally to resistance near $50. A rally to the $50 mark implies a gain of 9.6%. The stock has twice rallied to $50 since mid November, thus it’s not a stretch to expect the stock to retest that level here.

Three of my favorite technical indicators are also lining up to give the stock a near-term bullish underpinning.  The TRIX indicator is poised to do a bullish crossover, while the Williams %R ratio suggests that the stock is near-term oversold. Finally, the Elder Ray ratio is also suggesting that long trades  can be safely entered near the current quote. Note that all three of these indicators can turn very quickly, thus it’s important to be nimble with this trade. All said, my near-term target is $50, implying a 9.6% return on the trade.


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