AgFeed's Optimism should be your Deep Concern
AgFeed Industries wrote a report several weeks ago explaining that commodity prices falling only has a positive impact to their earnings revenue. They also keep saying, "Nothing wrongs. Everything's fine. Go safely to bed and please ignore the global slowdown."
Yes, perhaps hedge fund redemptions are part of the reason for AgFeed's severe drop in share price. But, it doesn't explain entirely why it trades for $4 a share and it doesn't explain why on a consistent basis it is underperforming the S&P by about 30.78% since July 8th, 2008.
Here's what common sense tells me about AgFeed Industries and commodity prices and the global slowdown impact:
1) China's factories have shut down all over the place and job losses continue to mount. Their stock market keeps falling and recently went down 9%.
2) If and when supply catches up with demand that will impact Hog and Feed prices. Even if demand is steady or keeps rising, the amount of unemployed will greatly impact the pricing of Hog and Feed as AgFeed has to lower their prices to push out enough volume to lesson the economic impact.
3) Will those wealthy districts in China where AgFeed bought farms consisting of business men who probably lost money hand over fist in the stock market and in their paychecks (if they still have a job they are probably getting pay cuts) still pay the same price for HOGS and FEED this year, for next year?
4) In the short term I don't think AgFeed is feeling the effects much with an economic slowdown in China but at some point, long term, they certaintly will.
They certaintly can't keep selling HOGS and FEED for high prices and let the masses that suddenly can't afford those high prices to starve. They could try but over time the Chinese Government will issue up a pork pricing cap/mandate and POOF goes AgFEED's margins.
Don't think China will down the road..long term...due a pricing cap on Hog and Feed? They certainly could if the economic situation deepens and lasts a long time becuase Hog and Feed are China's biggest commodities.
Commodity pricing drops in Oil, Nat Gas, and stuff that makes up their FEED product are a GOOD thing for AgFEED. Not going to dispute that. But I am going to dispute here AgFEED's ridiculous optimism. Because, no one should be that optimistic when China's economy is falling off a cliff.
5) The P/E Ratio is still extremely high at 14 P/E and we are in a global slowdown that has made P/E Ratios completely laughable. Imagine (FEED) trading at a 10 P/E or heck even a 3 P/E to match it's current forward P/E ratio.
What my point? My point is that AgFEED is doing a disservice to their shareholders and to their own share price by not acknowledging (at least) the possibility that what I am saying may indeed happen in the future if 2009 ends up being economically worse than 2008.
2008's earnings reports will be great... But they could be a PEAK until China can stimulate their economy again and get people back to work. Investors of FEED do have Gerry Daignault on our side along with a management team that knows their business better than anyone in China.
So... Think long term... The profits from FEED will come even if they don't next year or the year after that.