(I’m ratcheting up my vacation a notch next week for my annual summer recharge of my batteries and taking Jubak Picks completely dark for a week or so until August 24. I will resume my regular posting schedule when I return.)
What was most interesting about Vale’s (VALE) second quarter (July 29) earnings report wasn’t how much money the mining company made—although it made a metric ton—but what it’s doing with it.
For the quarter, net income surged to $3.71 billion or 70 cents a share from $790 million or 15 cents a share in the second quarter of 2009. That really wasn’t any surprise. Wall Street analysts had pegged earnings at 70 cents a share for the quarter on a doubling in iron ore prices from the second quarter of 2009 and an increase in production at the company. Vale sold 670 million tons of ore and ore pellets in the second quarter, a 29% increase from the second quarter of 2009. (Vale is the world’s largest producer of iron ore.)
In the last two years the iron ore industry (happily) and its customers (grudgingly) have moved away from a system of annual contracts with long-term guaranteed prices to one based on often rapidly fluctuating spot prices.
The future looks solid for Vale and its industry too. Global shipments of iron ore will rise 6% to a record 961 million tons in 2010, according to Clarkson, the world’s largest shipping broker.
So where’s Vale putting its profits?
First, into a fleet of ships and new distribution centers that will enable Vale to close some of the cost gap with Australian rival BHP Billiton (BHP) in shipping ore to China. BHP Billiton and Rio Tinto (RTP) have picked up share in the market for seaborne ore because of reduced demand in Europe and the shorter distances from Australian mines to China’s steel mills.
Second, Vale continues to invest in becoming a diversified mining company rather than just an iron ore mining company. Vale announced plans to buy Brazilian copper producer Paranapanema for $1.2 billion.
And third, Vale continues to build up speed in the race to secure a share of Africa’s iron ore deposits, the last really big undeveloped deposits of ore in the world. At the end of April Vale reached agreement to pay $2.5 billion for a 51% stake in BSG Resources to gain access to iron ore deposits in Guinea.
Not all this capital investment will come from profits or the capital markets. Vale will sell aluminum assets to Norsk Hydro for $4.9 billion in order to redeploy capital to faster growing businesses.
Vale is a member of my Jubak Picks 50 long-term portfolio (https://jubakpicks.com/jubak-picks-50/
Full disclosure: I don’t own shares of any company mentioned in this post.
Ed, in answer to your question, it depends on the company, the industry, why I’m buying, what I’m looking for. For me, the PE for POT is not meaningful. The reserves, market position (20% of the market), ability to control their production to meet demand and keep prices high are all factors. What some analyst predicts it will earn next year doesn’t mean much because all the inputs are so variable. In my view, POT is a great play on the expanding middle class in emerging markets. You get the exposure of their increasing standard of living without all the risk that goes with investing in Banana Republics (no offense to anyone from those countries- I just mean they don’t have developed legal systems where private property rights are generally respected). So I’m willing to pay a premium. So are most investors. POT has traded at a premium PE pretty much forever.
To say company X has the same valuation as company Y because they have the same PE is looking at a very small slice of the pie. Particularly when you’re talking about buying the entire company (the context of our discussion)- then it’s even more misleading. It’s value is its current market cap. Period. If BHP wants to buy it, to get management to go along (or shareholders to sell into a tender offer if it goes hostile), it’s gonna have to offer the equivalent of market cap, assuming a control premium has been baked into the market price. Maybe at 148 it has and maybe it hasn’t. Differing minds make a market. But to assume it’s going to go back to where it was on Monday simply because management has said pound sound and the shareholders didn’t all jump off the train at 130 is mystifying to me.
I have very much enjoyed-and appreciated-most of the comments/perspectives expressed in the blog. Checking egos at the door would be appreciated. I commend Jim-whom I have known since we were 10-for the even-handed ,analytic tone he achieves.More of that tone would be terrific.
southof8,
When did I say I was never wrong? 😉
Seriously, you tell me: How do you value a stock? Market cap is meaningless as a means to evaluate a stock. That’s like saying a pound of potash is worth more than an ounce of gold, simply because it weighs more.
Ed, a higher pe means only that the market is paying more for anticipated earnings. nothing more. To say something is more “valuable” based solely on pe ratios, forward or trailing, is myopic and misleading, to be charitable. Again, fungible language allows you to say you’re never wrong.
Didn’t Bob Dylan write a song about that?
southof8,
If the market places a higher P/E on a company than Apple, then the makret is giving a better valuation in that company’s stock. Whether it’s deserved is another matter.
I don’t think I was vague in what I said, nor was I waffling.
creativekev,
From a strictly business perspective, you’re 100% correct. I would even go so far as to say that Potash will be worse off under BHP. The only problem is that POT is not currently worth $130. It may be worth that sometime in the next 2 years, but not now.
cjxland,
SID’s website is http://www.csn.com.br/ri/ (click top right corner for English version)
I think BHP’s buyout of POT may not happen. BHP’s initial bid was too low at $130. There’s no way the deal occurs at that price. Since POT’s prospects are looking up because now is very possibly the start of a fertilizer application up-cycle, POT will and should hold out for a much higher price. If BHP really wants POT, they would have to get to that price – various sources have ‘estimated’ at $160 to $200. If BHP bids next in that range, how could its CEO convince the BHP board and its shareholders that it’s not wildly overpaying, given that it initially bid $130?
POT is in the driver’s seat here, since they are well positioned to do well over the next 2 years (and that includes POT stock) on their own, as farmers get back to applying fertilizer and China’s growth continues. They really don’t need BHP. And POT senior management probably don’t want to risk losing their jobs if the BHP buyout goes through. Overall there’s just not much of an incentive for POT to make it easy for a BHP buyout to happen.
So are about a thousand other companies. If you want to use such fungible language you’ll never be wrong. But you’ll never be right either. Your words will mean everything and nothing.
southof8,
Based on P/E, and forward P/E, POT is valued higher than Apple.
Ed you’re now just making shit up. Higher valuation than apple? WTF does that mean? Apple’s market cap is more than five times pot’s. If a pot holder was gonna take the deal at 130 they’d have sold at the open when pot treaded at 143. Reasonable minds can differ but offering opinions as facts and then making up new facts to support your opinion is what gets people so riled up.
I am going to add one more point: Who is going to bid against BHP? You only have to read Jim’s post to realize it won’t be Vale, as they are concentrating their resources in expanding their metals market share. And Rio just isn’t big enough to get into that kind of a bidding war with BHP.
There won’t be another bidder. Take your profits now, or take BHP’s offer of $130. Otherwise, the drop is back to where you were before this started, about $112. And it could be years before you see this level again, if ever.
oops, I meant to write “I’m going to look for another fertilizer company to invest in…”
It seems to me POT has gone from an “investment” to a “speculative play” right now. Ed is arguing from an investment standpoint it doesn’t make sense to buy POT. From a speculative play, it is hard to tell. I don’t think we have enough information to make a sound decision yet. I sold all of my shares for a 50% gain because I’m not willing to deal with the stress of trying to figure out POT as a speculative play. I bought shares because I saw them as a good long term investment.
I still see fertilizer as a good long term investment, I think I’m going to look for another to invest in with my profits from POT once things settle down.
ryan,
I will try and sound more stupid next time. 😉
Right now, the valuation for POT is higher than the valuation for Apple. And you expect for me to take seriously that POT has more long-term growth potential than Apple?
Granted, in a buyout situation, valuations get distorted. But you are assuming that it is a done deal that either BHP will raise their bid or another bidder will show up, when nothing could be further from the truth. If this deal doesn’t go through, this stock WILL drop. If the deal gets approved, the stock drops to $130.
But you are right about one thing: beware of so-called “experts” on blogs. Including yourself.
I came here this afternoon to see if anyone else was following the POT story. That you all are but there are far too many flaming posts. No one should take advice on a bog as written in stone. However, people who consistently contribute ideas are always worth listening to. It’s too bad that certain people here have problems with others but no one is forced to read anything. Diversity of opinion is far better than looking at your own reflection in a mirror and being impressed.
Just for the record, I am up 40% with POT and still holding. There was an interesting analysis today on Yahoo Financial discussing the Chinese opposition to a BHP takeover. These two have already crossed swords over iron ore and apparently POT holds a large minority position in a Chinese mining company. The Chinese do NOT want to find themselves forced to bow down to BHP. This should get interesting.
One last comment. Deere reported excellent earnings although their European sector was poor. Their future guidance for the rest of the world was good.
Personally, I value hearing all of the opinions that people like Ed and South bring. A diversity of information and perspective helps to vet and rank the opportunities and hazards in the market.
Also, w.r.t. Jim’s quietness, he’s been on vacation…
Lots of his posts here are article-length and end up being syndicated on moneyshow.com, msn and elsewhere. I don’t think he’s doing too much of that while on vacation. His posts on jubakam.com have been shortish, frequent and to the point. There have been no trade recommendations or targets.
While I’m looking forward to seeing him back, I think he’s taking a vacation at a quiet period in the market and I say he’s earned it.
OK I know I said I was not posting here any more but I want to explain why I have been on EdMcGon’s case. I’m sorry if some of you think I was mean but it really offends me when people spout nonsense couched in a bunch of “expert blather”. Ed does this on a very regular basis and if you need an example just read all of his posts right here regarding Potash.
They are factually incorrect (“the stock is dropping” “you just lost $13 a share”) they show a shocking lack of any expertise (“the takeover is going no where because management rejected the first bid”) and they evolve into downright funny in their inconsistency (read his entire last post, esp the part about Kraft).
I wouldn’t have said anything if Ed wasn’t so darned pompous and prolific or if it wasn’t becoming obvious that some of you were actually taking him seriously and might even be making investment decisions based on his advice.
Sorry if I have offended anyone but if I got even one person to stop listening to this nonsense I will feel good about it.
Good luck everyone. Think for yourselves. Beware of “experts” on blogs.
Oh..southof8…. instead of buying back the shares consider call options. The dec $145s are not a bad bet at $10.5 or so. You profit if the final price is above $156 yet you risk only $10.5 of your profits. Glad you made a nice profit!
Southof8, Ryan & Sigli…I have been reading Ed’s comments on Jim’s picks and watches for quite some time. Please stop this nonsense…Ed please keep up the good work. Even when I and YX were arguing about India…Ed came up with a clean opinioin (negative opinion) without being nasty. So quit whining…..Unless Jim boots anybody from this page…I think you guys don’t have any right to be nasty to Ed..
southof8,
And Kraft came back with a higher bid, not a lower hostile takeover bid.
For your consideration:
http://blogs.forbes.com/nathanvardi/2010/08/18/bhps-potash-deal-might-not-happen/?partner=yahootix
IF BHP is willing to put up $200/share for POT, they might bite. POT might even settle for something in the neighborhood of $160-170. But until then, this deal is far from over.
If BHP does pay $200 for POT, they’re fools. Paying nearly a 100% premium on a stock, in an uncertain economic environment? That’s insane. Especially when you consider BHP already has a potash operation.
Don’t get me wrong. POT might be worth that $200 next year, or even the year after that. But there is plenty that has to go right for them to get there. To think they are worth now what they were worth near their peak in 2008 is a bit of a stretch.
Ummmm, dismissing an offer outright as being too low is definitely a negotiating tactic. See, e.g., Cadbury’s response to Kraft.
Financial Times had some neato graphs and charts this morning showing just how much Potash orders ramped up from 200 to 2007 and then crashed. 2009’s consumption was close to 2000’s. Any backyard gardner can tell you withholding nutrition won’t hurt in the short run but will in the long run. There is no question Potash use is going to ramp up and prices with it. This story is not over and Ryan is exactly right that POT sells for closer to 200 than 130. UBS this morning upped its price targed to 170 and I think that is within a few bucks of the take out price BHP will pay. No POT shareholder is going to sell out at 130 with the stock at 128 a couple months ago. BHP is posturing with all its talk of hostility.
But disagreements make a market. Might buy back my 25% sold yesterday at 143.92.
Ryan, we’ll miss you. YOur insights are money. Thanks for giving a weekend player a chance to share your knowledge.
This is a financial blog. Please take your personal criticisms elsewhere.
sigli,
If anyone out there is taking my advice without doing their own research, I agree with you. But I never claimed to be an expert, pseudo or otherwise. If you, or anyone else, don’t like the fact I’m not throwing a disclaimer behind every opinion I give, that is your issue, not mine.
If someone wants to constructively critique my opinions, have at it. I welcome such criticism. I welcome other people’s views, even when they differ from my own. You and ryan are welcome to tell me I’m wrong. All I ask is drop the nastiness. I’m not doing anything wrong or evil, just expressing my opinion.
ryan,
POT is up on speculation that someone is going to overpay for it. Mind you, no one has made that offer, and the only offer on the table is still BHP’s for about $17 less than it’s trading for now.
As for POT’s negotiating skills, if they were actually negotiating, they would have made a counter-offer to BHP. Flat rejection of BHP’s bid is called “walking away from the table”. There is no negotiation going on.
Finally, when did I claim to have “great expertise”? Just because I don’t waffle on my opinions doesn’t make me a self-proclaimed expert. I put my opinions out there, and if you want to prove me wrong, or even suggest an alternative idea, have at it. That doesn’t mean you have to be nasty about it.
Take the POT situation for example: Can you say with 100% certainty that POT will even be bought? If the shareholders reject the $130 offer from BHP, and nobody wants to offer more, then it simply doesn’t happen. On the other hand, if another buyer doesn’t come forward, the shareholders might take the $130 offer, which is still plenty generous, since POT cannot currently maintain a price of $147 on it’s own (with a P/E of 31? Get real!).
“I am offended by his kind of psuedo expertise.” Exactly. It’s one thing to stick your neck out and make call after call after call. It’s a completely different thing to make flippant remarks postured as deep balance sheet insight (which were actually taken from a web service that may be completely wrong, or skewed by various events, rather than true study of the 10-k’s, etc.).
Look, I like you fast Eddie. You can contribute much. What I don’t appreciate is that you don’t simply say “I have no clue” when your responses tell those who know better that you don’t. Your posturing is going to hurt a lot of unsuspecting people, and I’m not sure that should be left without criticism. Then again, who am I to care if someone needs to learn a lesson the hard way?
Eddie McGon I think you need a new ticker since I see POT up today. Since you asked, the drivel part of your post was that we should sell out of POT because management rejected the bid and the “stock was already dropping”. First you could expect a small initial decline (and it was very small and short lived) since there are always a few people who get suckered out like you or who just want to lighten the load a bit to remove some risk. In case you didn’t notice the stock was up nicely.
Second, if you ever had any experience in any kind of market or negotiation you would know that a “rejection” is just a tactic. It is one thing to be naive and foolish Ed but it is a whole other thing to profess great knowledge and spread your ignorance to unsuspecting newbies. That, folks is why I have been on Eddie’s case. I am offended by his kind of psuedo expertise.
Anyway, the Potash story is far from over and the final price will probably be closer to $200 than $130. Hold on to a few shares at least so you can enjoy the ride since this kind of bonus comes along rarely enough.
I have liked Jim’s insight for many years but since Jim is going the “for pay” route I am no longer going to spend any time here. I actually make a living in the market and don’t really have any more time for this.
Good luck guys and remember to think for yourselves.
Off topic: “Construction lending is really the cocaine of the banking industry,” says veteran banker Rollo Ingram. “They’re easy to do. They’re big-dollar loans that can bulk up a balance sheet. And there are always developers who want loans.”
http://www.usatoday.com/money/industries/banking/2010-08-17-banks17_CV_N.htm
“Across the banking system, nearly 17% of construction loans were non-current — at least 90 days past due or otherwise in trouble — at the end of March, a record level and a stark contrast to less than 5.5% for all loans, according to the latest numbers available from the Federal Deposit Insurance Corp. For construction loans on one- to four-family residences, the percentage of bad loans is even worse: nearly 23%.
Southof8 – Thank you – agree totally with you on Ed.
In the normal human psyche, criticism is mostly borne out of jealousy, and the intelligent mind learns something from everybody, from everything.
I discoverd JJPicks just a few months ago – but I have read a lot of positive feedback on Ed’s posts. Many have sought and benefited from his opinions/advice.
Personally, I have learned much, and not just about investing, from everyone in this ‘open classroom’. Thank you All!.
For the POT holders … just in case, you missed this: “Analysis: Russians still set to hold potash pricing key” http://www.reuters.com/article/idUSTRE67G40F20100817
Good day, everyone!
At least in pre-market, POT is up to $146 and change. The move to a hostile bid will most likely drive the price up. The $130 offer is too cheap and will fail, so BHP will have to throw more coin on the table. Either way, it could be drawn out for a bit, unless some large shareholders of POT are ready to cash out.
ryan,
Would you mind pointing out the “drivel” in my comment, since I didn’t say anything more than what you agreed with?
I told you guys to sell POT yesterday. Now you just lost another $13/share:
http://noir.bloomberg.com/apps/news?pid=20601087&sid=a4GI.nrrj.EA&pos=1
Until another bidder shows up, you’re stuck with what you’re getting. Frankly, the only chance you have of getting more on POT is if another company was already eyeballing them for a takeover, or tries to stupidly outbid BHP just for the sake of outbidding them. Most companies don’t generally make a buyout bid without at least some due diligence.
sigli,
And LUK is a great stock because a bunch of big-time investors are losing their shirts on it? Look at the results for LUK:
For the past week: -4.6%
Past month: +5.2%
Past quarter: -7.1%
Past 6 months: -8.6%
Past year: -14.1%
Unless they bought it a month ago exactly, they are losing money on this dog. The chart is ugly (a downward wedge) and it has an overpriced P/E (26). Even IF you think this stock is going to be something special, it hasn’t shown the past performance to justify it’s price, and now it has to improve going into a weak economy? Let me know how that works out for you.