Since the BP oil spill started eight weeks ago, the stock has lost roughly 50% of its value. Buying the stock now at these prices has been a topic that has come up frequently the past few weeks. Even some value hedge fund managers like Whitney Tilson have announced recent stakes in BP. I thought about comparing the oil spill to the Three Mile Island tragedy in 1979. Back then General Public Utilities, the owner of Three Mile Island, also saw its stock crater to below $4/share (it eventually recovered many years later and reached a high of $32 and change in 1988). I think it’s still too early though to make a call with BP. There are just too many unknowns and I think BP has done a terrible PR job. The oil disaster also appears much worse than expected with initial spill estimates going from 5000 barrels a day to possibly 40,000 barrels a day. We know from the Exxon Valdez spill that approximately 257,000 barrels were spilled at a cost of roughly $2.5B in litigation. That comes out to about $9727/barrel, but if we take inflation into account (20 years ago) we’re probably looking at $16,600/barrel today for litigation costs or a total of $4.27B according to the inflation calculator. So lets say BP is spilling 40,000 barrels a day:
40,000 x 120 (4 months to stop) = 4.8M barrels or almost 18.6 times the amount of oil from the Exxon Valdez spill
18.6 x $4.27B = $79.7B
Now BP earns a ton of money- approximately $20B year. There are currently 3.1B or so shares outstanding so we get about $6.45 earnings/share annually. So if BP were to pay out the total $79.7B in damages over the course of 10 years then we’re looking at a hit of approximately $2.5/share over the next decade. At roughly $4.55 earnings a share ($6.45-$2.5) you get anywhere from $36-$45/share with a 8-10 PE multiple range. So your upside is limited while the total liabilities are still unknown. Who knows? Maybe it takes longer than 4 months to finally stop the oil spill. Worse yet, the total exposure to the economies along the gulf and the health problems caused could easily bring the total liability to exceed $100B. Also, what if BP is forced to reduce its other operations elsewhere to retrofit the rigs with more safety measures? This will further depress their earnings. You can almost bet that the dividend will be suspended. The larger issue now appears to be whether or not BP is like AIG and too big to fail because of all the pension and mutual funds that have a stake in its equity and bonds.
Bottom line is that BP is still a risky stock here despite the 50% drop. There are probably better (and safer) opportunities elsewhere.
I recently wrote to the investor relations department at Agfeed Industries regarding the receivables. It appears that the recent decision to extend their customer’s receivables has adversely impacted their stock. Keep in mind the response is from the IR department so obviously there is so bias.
1) Are the durations of extensions now increasing, decreasing or flat from the previous quarter?
The durations are generally for 60-90 days. We are collecting the majority of the recent extensions by the end of June to show how short term the loans are.
2) Are you folks charging any interest rates on the outstanding receivables?
That is not a good practice in China. Secondly, business is conducted in a more supportive manner; particularly if the customers need a few months for the market to turn up. We made a calculated decision for we are also in the hog production business and we see positive prices in the last half of the year.
3) Do you have any estimates about rates of defaults for the receivables (if any)?
We have written off less than $300,000 over 3 years.
By now most you have probably heard about the record number of foreclosures and how the banks are so backlogged with processing them that some home borrowers have decided it’s better to just stop paying and live rent/mortgage free.
I have to say reading this sorta ticks me off. It’s not that I want to see people thrown out on the streets and become homeless. Also I know that the lenders share some blame and that the bankers made so much money off both sides of the real estate collapse. It’s just that nobody wants to take any accountability it seems for the mess we are in. Leave it to the government to handle this? Good luck. They’re just going to try to get the banks to take the write downs (which they are reluctant to do) and issue yet more unemployment benefits extensions. The politicians won’t nationalize the banks because their friends are working there and it would be an admission of the failure of free market capitalism.
A lot of people will say that if we don’t help the U.S. citizens who are struggling we’re going to continue to see 10%+ unemployment rates. My question is what if we keep digging ourselves in more debt and printing more money so that we see 15%+ unemployment 10 years from now?
It’s time to pay the bills, folks. Few people who are down and out don’t seem to want to accept the reality that 1) their homes will lose over 50% of their value 2) that they need to start taking measures to remain competitive in the workforce instead of blaming others for their problems.
It has been a roller coaster of a ride the past two weeks. I don’t think the downturn is finished even after today’s 280+ point rise on the Dow Jones. There’s still some lingering issues about Greece and whether or not their debt will ultimately have to be restructured. The Spanish banks still have to come clean with their subprime loan losses. Two stocks I’m keeping an eye on are FEED and ING.
I wrote about FEED awhile back and I have already taken a position at an average of $3.38/share ($3.50 and $3.27 purchases). FEED is very attractive given its growth rates. A lot of Chinese stocks have been battered, but what’s good about FEED is that corn prices are starting to drop. The Chinese government has promised to keep an upper limit on corn prices and has also been exporting record amounts of corn from the United States. FEED has been battered because of the rising costs of corn (used to feed the pigs). It’s a business that is tough to emulate because of the complexities of starting pig farms and creating a distribution channel to sell the pork. Contrast this with another Chinese stock like China Finance Online [JRJC] that has also fallen sharply because of copycat websites that offer similar financial services and advice. The tangible book and book value of the stock is listed at around $2.87 and $3.43 a share respectively. When corn prices stabilize and perhaps decline the 2nd half of this year I expect FEED to earn roughly $.09-$.10/share per quarter making it quite attractive at today’s current prices.
Still finding out more about ING, but it would be attractive if there was more distress in the European financial companies and if it drops below $5/share.
Uniqlo may be one of the largest clothing retail stores you have never heard of. I knew of the company from my travels to Hong Kong and my first impression was that it was like Gap with its large selection of denim jeans and solid colored shirts. Uniqlo is a subsidiary of Fast Retailing, Japan’s largest clothing retailer. As of May 2010, there are approximately 950 Uniqlo stores worldwide. Most Uniqlo stores are still located in Japan, but if all goes according to Fast Retailing’s plans, that will soon change.
Here’s Mr. Taleb back on CNBC after almost a one-year hiatus. It’s sort of awkward how this segment starts as they try to get him to speculate on the cause of last week’s 900 pt. drop on the Dow. If you read the “Black Swan” or “Fooled By Randomness” you’d know that Taleb doesn’t think too highly of CNBC, but here he is again to promote the new updated paperback version of his book and offer his thoughts on the next black swan.
Now I’m not sure if some failed auction will trigger the next black swan… I suppose you could argue that China, Iran or North Korea firing nuclear missiles would also trigger it. The thing to note is that these supposed six-sigma events like last week’s sudden drop happen far more often than we realize. The Euro zone bailout hinges on the ability of the governments to implement their austerity measures and collect enough tax receipts to repay their balance sheets. We have to wait to see how this pans out, but if I were a government official I would be conservative in projecting revenues as they are almost always overly optimistic. Also, I would implement tax raises across the board… this will probably not get any politician re-elected, but it’s better than kicking the can down the road. California is now facing more budget cuts and trying to mend the gap without raising taxes. To compound matters, the government there is pretty gridlocked and not able to do much. Contrast this with China’s one-party rule and its ability to implement top-down measures to cool the economy… this is why I don’t think China will face too big of a downturn as they implement measures to cool down inflation and real estate speculation.
Here’s today’s (5/13/2010) interview. This one is much better. Bloomberg segments are better simply because the hosts don’t keep interrupting the speaker like they do in CNBC.
Looks like iGo Technologies [IGOI] beat analyst expectations of a breakeven quarter and posted earnings of .02/share. Last week, I sold some IGOI to buy SFSF. The .02 beat appears to have come mostly from cost cutting and higher margins via direct sales (as revenues declined compared to Q1 2009). iGo is now generating positive cash flow and currently has $33M or so. The market cap is $52.4M as of today so you’re buying a business that is expanding (selling through Office Depot as well now) and that has seen its major competitor, Targus, slip with a faulty adapter. Still, given the overall market headwinds, iGo may not move much despite the overall positive results and sentiment from today’s conference call.
The way Simon Properties Group [SPG] is trading and confirmation about ongoing talks happening with General Growth Properties [GGP] would indicate that a higher bid is likely. Either that or Simon would relax some of its measures to withdraw its bid in the event of antitrust proceedings. It would also appear that Brookfield may up its bid. In either case, it is very likely that GGP is headed higher.
So who do you listen to when it comes to the job recovery? On the one hand there are people like Nouriel Roubini who said today that he expects unemployment in the United States to remain stubbornly high at 9.7 percent. On the other side, you have people like Warren Buffett who, over the weekend at the annual shareholder conference, said that he expects a job and manufacturing recovery.
Awhile back I had posted my CNBC cheat sheet. Roubini was listed as a “Perma Bear” and he has remained true to form with his recent comments on the Euro zone and the job market in America. Personally, I’d go with Buffett. Why? Because he is more in touch with the day-to-day activities of many businesses and if he sees an overall net hiring trend, then I think that holds more weight that Roubini’s projections.
The problem with market prognosticators is that they have to market themselves so that producers will know who to bring on for which viewpoints of a segment. Equally difficult to believe are shareholders with vested interests in companies that will talk their book. In the end, you really have to decide for yourself. If you saw the CNBC cheat sheet, here’s an exercise. This is a link to a recent interview with Meredith Whitney. What do you think she’ll say about banks?
I read today in an article on Bloomberg.com that Nike plans to pursue acquisitions to grow its revenue. I wrote awhile back that Lululemon [LULU] may be an acquisition target for Nike. Since then, Palm has been acquired (much to my surprise) and Dave and Busters was sold to a PE firm (I was thinking BJ’s Restaurants would be a PE acquisition). Nike has been making a big push to promote Yoga; especially in Asia. I like both LULU’s stock and the $60 September calls here. Another angle is to consider if Nike will acquire footwear companies that do business in China. Exceed Company [EDS] is another good candidate for Nike to acquire.
