World Food Shortage and the Ethanol Bubble

Below, I republish Kevin Kersten's Article from bstocksdev.weblogsinc.com. Hopefully he doesn't mind, here is :


World food shortage and the ethanol bubble
Posted Jul 7th 2008 1:27PM by Kevin Kersten
Filed under: Archer-Daniels-Midland (ADM), Mexico, Deere and Co (DE), Politics, Commodities, Agriculture, Green Stocks, Bunge Ltd. (BG), Potash Corp. of Saskatchewan (POT)


We had the internet bubble and the real estate bubble and now, there is the ethanol bubble. Recently, I ran some numbers on ethanol and to my amazement realized that it is – too use a catch phrase from the environmental world -- not sustainable. Turning food into fuel is just plain silly; and when oil prices come down the ethanol bubble could pop big.

I ran did a little research and found some numbers:

• 47% of the Mexician' diet is corn
• it takes 2.4 pounds of corn a day to feed a hungry person
• it takes 22 pounds of corn to make one gallon of ethanol
• there are 42 gallons of refined gas in one barrel of oil

Now, a little basic math can be very enlightening. To replace one barrel of oil, it takes 42 gallons of ethanol or (42x22)=924 pounds of corn. That is enough corn to feed one hungry person for (924/2.4) 385 days – a little more than one year.

If you fill up with ethanol, every time you pull that SUV into the gas station and pump 22 gallons, you starve a poor person for six months. Another way to look at a barrel of oil is that it has enough energy to feed a person for the entire year. Using that logic, the much debated Arctic National Wildlife Refuge -- with at least 3.2 billion barrels of oil -- contains enough food to feed the entire world for six months. If you think my estimates are wrong, you're right; the real math is actually worse.

So what does that mean for investors? When the public and politicians own up to the fact that food for fuel causes world food prices to rise and starve the poor, all those companies currently flying high on ethanol could come crashing to earth. A few of the companies that have been running on the recent ethanol excitement include Monsanto (NYSE: MON), Potash (NYSE: POT), Mosaic (NYSE: MOS), John Deere (NYSE: DE), Archer-Daniels-Midland (NYSE: ADM) and Bunge (NYSE: BG).

Kevin Kersten is an Stock and Options Analyst with InvestorsObserver.com. Disclosure note: Mr. Kersten owns and/or controls a diversified portfolio of long and short positions that may include holdings in companies he writes about.


Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Apple Inc. (AAPL)'s Q3 2008 Earning Estimation

Apple (AAPL) is expected to report Q3 earnings on Monday with a conference call scheduled for 5:00 pm ET. I summarize the material below from theflyonthewall.com:

According to First Call, The consensus estimate is $1.08 for EPS and $7.36B for revenue,

CFO Peter Oppenheimer said in April that the company expects to earn $1.00 a share in EPS on revenue of $7.2B. The "whisper" number is $1.11. The company is known for low-balling expectations and being conservative with its fiscal outlooks.

Sanford Bernstein expects Apple to top the average estimates, and expects Apple to earn $1.12 a share on revenue of $7.6B. Bernstein said Apple's Macintosh and iPod sales likely were strong during the quarter, and that the company probably benefited from U.S. consumers spending their economic stimulus checks on Apple products. The firm believes Apple will report Mac sales of 2.5M units, 10.3M iPods, and $400M in iPhone sales for Q3. As far as the iPhone is concerned, the new 3G model was released after Apple's Q3 ended in June, so none of the 1M devices that were sold in the first weekend of availability will have any effect on the upcoming results.

Piper reiterated its Buy rating ahead of Q3 results as it believes upside to Mac and iPod units may drive upside to the June quarter. The firm believes Mac units could reach 2.35M, above the Street's 2.2M estimate.

Pacific Crest echos that sentiment saying that strong consumer demand for Mac and iPhone, along with an attractive component pricing environment, can drive near-term upside to estimates. Additionally, increasing enterprise penetration can add to near-term demand while extending Apple's growth period.

Additionally, FTN Midwest's checks indicate Mac sales are above plan in June and July is off to a good start. Now that the initial hoopla surrounding the release of the 3G iPhone has settled down, analysts are more likely to keep their eyes on what Apple will have to say about the outlook for its current Q4. PacCrest believes Q4 guidance will likely be conservative. But, strong demand for iPhone along with a likely Macbook refresh during back-to-school should drive excellent Q4 growth.

While Bespoke Investment presents the table below as key companies expected to report from July 21st through the 25th. He noted that expectations are always high, so anything less than a beat for Apple will not be taken well.


While Andy M. Zaky, Bullish Cross, Special to AppleInsider, wrote:

Based on an analysis of Gartner Group's recently published estimates on domestic Macintosh sales, AppleInsider contributing analyst Andy Zaky estimates Apple to have shipped 2.54 million Macs during its third fiscal quarter ended June.

Extrapolating Gartner's Data

According to Gartner, Apple shipped about 1,397,000 Macs in the United States during the three-month period that ended on June 30, 2008 (fiscal Q3). In fiscal Q3 2007, domestic sales made up 57.31% of total Mac sales. Based both on the recent trend of U.S. shipments making up a smaller portion of total Mac sales, and on the anticipated slowdown in consumer spending (due to the rising price of oil and other inflationary pressures), domestic sales could reasonably fall to about 55% of total sales.

As the table below indicates, U.S. Mac sales as a percentage of total sales fell moderately in Q1 and Q2 from the same periods last year. U.S. Mac sales made up a total of 44.63% and 44.12% in Q1 and Q2 of 2008, falling from 50.31% and 48.85% in Q1 and Q2 of 2007. This could be explained in any number of plausible ways.

First, one could argue that worldwide Mac sales are growing at a much higher pace than in the U.S. and that one should expect U.S. sales to make up an increasingly smaller portion of total shipments. The historical chart (below) on Mac shipments lends some support to this theory. Sales in Europe were blistering hot in Q1 and Q2 when compared to other periods in Apple’s history and when compared to the U.S. in general. Mac sales in Europe were up 43.60% in Q1 and 44.80% in Q2; while in the United States, Mac sales were up only 28.1% and 36.3% during those same time periods, respectively.


Furthermore, European sales continue to have a prominent impact on overall Mac shipments. For Q1 and Q2, European sales made up about a third of total Mac sales (30.5% in Q1 & 27.4% in Q2). The U.S. by contrast, made up about 44.63% in Q1 and 44.12% in Q2. Thus, European Mac sales are not only growing at a faster pace than in the U.S., but have a solid overall impact on total shipments. This tends to suggest that the U.S. will make up a smaller total portion of Mac sales in Q3 as it did in Q2 and Q1 when compared to last year.

Secondly, one could argue that the recent slowdown in consumer spending (a foregone conclusion on Wall Street that has yet to be proven) has had at least a marginal impact on domestic sales. While it is yet to be seen whether a slowdown in U.S. consumer spending will ever actually occur, and if it does whether it will affect Apple, it’s nevertheless something that shouldn’t be easily dismissed. If U.S. consumers have in fact recessed, then the Gartner estimate, as impressive as it is, is even more impressive when considering the state of the consumer.

It should be mentioned that the Gartner Group estimates cannot be tested for accuracy and that the arguments put forth in this article are based on Gartner’s findings. Apple does not release data on U.S. Macintosh sales so there is no way to compare Gartner’s findings with Apple’s actual reports. Apple reports U.S. sales under the heading of two separate operating segments.

One operating segment, the “Americas,” presumably includes North and South America while the other operating segment, “Retail,” includes the U.S. and any other countries where Apple retail stores are located. Thus, it makes it nearly impossible to determine exactly the number of Macs Apple has shipped in the United States. Yet, the table below gives a rough approximation of U.S. shipments by combining both “retail” and the “Americas” since U.S. shipments probably make up the vast majority of each of these two segments:
Supporting Argument Based on Current Growth Rate

While the growth rate in Mac sales, taken alone, doesn’t present with particularly strong predictive evidence of where Mac sales will fall in Q3, it can be supportive of hard evidence such as that presented by the Gartner Group. The current trend in Mac sales suggests that Apple will report between 2.547 million (based on the 44.39% growth seen in Q1) and 2.662 million Macs (based on the 50.89% growth rate seen in Q2).

Alternatively, one could also compare the sequential growth rates between Q2 and Q3 of previous periods and apply the differences to this period. For example, last year (2007) Apple reported a 16.28% sequential growth rate between Q2 and Q3. In 2006, that sequential growth rate was 19.33%. Based on the most recent sequential growth rate of 16.28%, Apple would report about 2.662 million Macs. Yet, sequential growth rates and current year-over-year (YoY) growth rates have only modest predictive power due novel conditions and to the law of large numbers. At some point, Mac sales are going to be so large that Apple will not be able to sustain its 50% growth rate that it enjoyed in Q2.

Supporting Arguments Based on NPD Data

NPD data for the months of April and May indicate that Mac sales are up some 50% from the same months last year. If NPD data for the month of June also suggests 50% growth, then it’s possible that Apple could record nearly 2.646 million Macs in Q3. Yet, NPD data has tended to suggest conclusions that have been proven overly aggressive in the past when it comes to Mac sales. Yet NPD data is supportive of a 2.54 million Mac estimate if viewed conservatively.

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.

Peabody Energy Corp. (BTU) and Other Coal Miners are Undervalued, Now

Bloomberg wrote on July 18, that after Cleveland Cliffs (CLF) bought Alpha Natural Resources (ANR), there may be many more acquisitions in the coal industry. Actually, the market valuations of some of the largest coal companies are far below the value of their coal deposits, while takeovers of energy and mining companies have soared this year.

According to BTU's Short Interest Ratio, Short interest can be a measure of investor pessimism. As contrarians, the heavy Short Interest Ratio is seen as a bullish sign for uptrending stocks. However, if a stock is in a downtrend, it could suffer additional losses as the bears increase their short positions. Let's see the chart below:

Source: Schaeffer Research

Currently, BTU's chart is also forming a bull pennant and falling wedge that are signal to buy. Let's see the chart below:



Citigroup Global Markets analyst John Hill on July 6, figures that the sell-off was overdone, and that coal is benefiting from "structural change" as fragmented regional markets are linking up and "going global."

In a note to clients he wrote:

This [sell-off] seems profit-taking amid a deteriorating economy, and the 'End of the beginning, not the beginning of the end.'

Mr. Hill believes that the bull market for coal has several years left to run because of mine shortfalls, transport constraints, thin stockpiles and massive demand from emerging markets like China and India.

While he expects metallurgical coal prices to increase through 2009, he thinks that a lot of the names in that space are fully valued. But he believes that the coal producers in the Powder River Basin in the United States are undervalued, and has upgraded Peabody Energy Corp. (BTU) and Arch Coal Inc. (ACI) to "buy" from "hold."

Here is the summary of Guy Bennett's Article in SA, Entitled "Coal Stocks: Make Money in Picks and Shovels" :

Currently, 50% of the electricity generated in North America comes from burning coal. While China currently generates 80% of its electricity from coal. There is enough coal left on the planet to last another 230 years. Since 2000, the price of coal has risen from $30 per tonne to around $120 per tonne. The Chinese are paying twice as much for coal now than they did a year ago.

In recent months, any stock with coal dust on it has been heading north.

Patriot Coal (NYSE: PCX) is up 300% in the last 4 months. Alpha Natural Resources (NYSE: ANR) is up 500% in the last year. Peabody Energy Corp (NYSE: BTU) is up 166% in the last 10 weeks. Van Eck Market Vectors Coal ETF (NYSE: KOL) is up 43% in the last 3 months.

The last couple of weeks, Patriot Coal lost 18%, Alpha declined 10%, Peabody is down 12% and the Van Eck Coal ETF fell more than 10%. Industry analysts believe that coal supply deficits will continue until 2011.

Bucyrus International Inc. (Nasdaq: BUCY) is a $4.6 billion company that manufactures equipment for the coal mining industry, and other mining sectors.

They have surpassed analyst earnings estimates for the last four quarters by an average of about 18%. Q108 orders increased 58%. They currently have a backlog of $2.07 billion worth of mining equipment on order.

Their biggest competitors, Joy Global In (Nasdaq: JOYG) and CNH Global NV (NYSE: CNH) have quarterly revenue growth of 34% an and 25% - compared with Bucyrus’s quarterly growth of 171%.

Bucyrus share price has doubled over the last 12 months. This is not a volatile stock. The gains are steady, attracting risk-averse value investors. A resource boom will create winners out of companies that sell picks and shovels.

Worldwide, we consume about $1.5 trillion worth of coal per year. Coal is mined in 100 different countries. Environmentally it’s a bad marriage, but until we divorce – as investors – we may as well treat it with respect.

Related Posts :

Lets Consider to Buy Peabody Energy Corp. (BTU) and other coals
Bucyrus International, Inc. (BUCY) Pre-Earning Release

Please Note!

This is generally never true. Before buying or selling any asset you should do your own research and reach your own conclusion. See my Disclaimer on the bottom for more information.

You are welcome to republish this article, or any portion thereof.
Please, cite the actual/original source. I would be grateful if you could link back.