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Tanker stocks ready to rebound? / Wonder-ful results / Monsanto rumor / Windfall taxes

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August 07, 2008 – Comments (4) | RELATED TICKERS: FRO , WATG.DL , MON

The stocks of tanker companies have been hit pretty hard over the past month or so, even shares of my favorite one Frontline (FRO).  Rightfully so, too given the massive 46% drop in oil-tanker rental rates that was reported last week.  Rates may soon begin to reclaim some of the ground that they lost though.  Bloomberg is reporting that tanker owners have instructed captains to slow down their ships.  The average speed of very large crude carriers (VLCCs as they are called in the industry) has reportedly dropped 3.8% to 10.21 knots since July 12.

This slowdown will theoretically reduce the supply of available ships and cause shipping prices to rebound.  The last time tanker owners pulled a move like this, in the last quarter of 2007, tanker rental rates posted their fastest two month rise in at least 16 years!

On this news, I have added two more tanker companies to my CAPS portfolio, in addition to FRO which I am already long.  They are Nordic American Tanker (NAT) and Knightsbridge Tankers (VLCCF).

Oil Companies May `Panic' on Tanker-Rate Outlook 

A Very Large Crude Carrier

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I have been talking a lot about the disasterous auto sector lately.  Well, there's actually one company in this area that is performing well, Wonder Auto Technology (WATG).  I just took a quick look at the second quarter results and at first glance they look absolutely Wonder-ful MWHAHAHAHAHAH, oh that,s a good one...no oh sorry.

It appears as though Wonder beat analysts' estimates by a penny, coming in at $0.20 per share versus $0.16 last year, a 25% increase. It is important to look at the increase in EPS rather than gross earnings because the company's massive dilution makes its mind-blowing 68% increase in profits looks a lot worse. If I recall correctly, WATG sold something like 3 million shares in a private placement for $8.6 earlier in 2008. Having said this, if the company continues to grow like this and it doesn't issue any more shares it could really knock the cover off of the ball once the dilution issue is behind it.

Wonder's margins and revenue are improving nicely. It has a decent amount of cash on the books and excess production capacity at its facilities. Hopefully, this will enable them to continue this rapid growth without issuing any more shares. For Q3 it expects its sales revenues to grow "strongly" to $39.0 million with the gross margin to exceed 25.5%. I'm not sure what its revenue was during Q3 '07. The margin number is slightly lower than the 25.9% it put up in Q2 '08, but still much stronger than the 24 range that we saw in 2007. Solid margins are impressive at a time when raw material costs are so high.

Any way you slice it, this is some amazing growth for a company that was trading at only 13 times earnings prior to the release of these numbers. The beat down of the Chinese market certainly has provided some outstanding values out there. Wonder has slid from a high of over $12.50 to its current level of $8.44 since the beginning of the year. I'm sure that the new shares had something to do with this. I'm going to see if I can squeeze WATG into my bloated CAPS portfolio. If I has more cash on the sidelines, I might consider buying shares in real life...which is saying something because this is a company in the auto sector which I couldn't be much more bearish on than I am right now. As long as Chinese growth doesn't fall off of a cliff, the slowdown in the rest of the world will certainly put the decoupling theory to the test, Wonder should continue to roll along nicely. Currently only 14% of its business is outside of China. Thinking about it, if Wonder is a low-cost producer, which I assume it is, the slowdown in auto sales in the U.S., Japan, and Western Europe might actually help its export business as squeezed automakers try to cut costs by purchasing less expensive parts from China.

Bottom line, this looks like a great quarter to me. WATG is currently up around 3% on the day.  I added it to my CAPS portfolio this morning.

Wonder's CEO ringing the NASDAQ opening bell in late 2007 

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Rumor Mill

Despite the recent precipitous drop in the price of corn, ag companies still have tremendous pricing power.  According to a contact that I have who speaks with farmers on a regular basis, Monsanto (MON) recently raised the price that it charges farmers for a bag of corn seed by $50 to $300.  I haven't seen any official news reports on this, but if it is true it bodes well for Monsanto's future earnings even though prople are hopping off of this bandwagon.  Monsanto's stock has pulled back more than $30 from its June high to the $107 that it sits at today.  I have personally ridden MON to over 133 CAPS points, but I would not hesitate to add a position here if I didn't have one in CAPS already.

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Take a look at this table that Bespoke recently published:

 

The table is a summary of the cash taxes paid in 2007 by companies in various sectors.  I have come up with two key takeaways from this, one on my own and one that Bespoke mentioned.  \

1)  I'll start with my original work first.  Last year companies in the "Financial" sector paid $88.6 billion.  I can't remember where, but I read that banks, particularly investment banks, aren't doing that well this year.  If this is true ;), then the government is going to lose a whole lot of revenue that they are going to either have to make up for by A) cutting spending HAHAHAHAHAHA yeah right, B) raising income tax on you and I, or C) just printing more money.  I suspect that a combination of B and C will eventually happen.  B) would probably be bad for consumer spending and possibly even housing and C) would be bad for the U.S. dollar.

2) The "Energy" sector paid the highest taxes as a percentage of their gross revenues, the Energy sector was the highest at 6.37%.  Where does one get the idea that the sector that is already the most heavily taxed should have additional "windfall" taxes.  Oil companies margins aren't nearly as large as the margins in other industries.  If one doesn't care about fairness and still wants to implement a tax that would do more to hurt production and raise energy prices than to lower them, the least they could do is use the money to fund something useful like research on conservation or alternative forms of energy rather than using it to buy votes and encourage consumption which will only cause prices to rise.

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Quick Hits -  Burgernomics says currencies are very dear in Europe but very cheap in Asia:  Interesting article, though I don't puch much faith in its findings that the Euro is currently overvalued by 50% versus the U.S. dollar.  I do believe that the Japanese Yen is currently undervalued by 27% versus the dollar though. 

 

Retailers May Flunk Back-to-School as Costs Soar, Sales Stall:  Analysts are predicting the worst back-to-school season for retailers in seven years.

Bear Market In Japan May Be Nearing End: Financial News:  An interesting Investor's Business Daily article predicting a good year for the Japanese stock market in 2009.

Deej 

4 Comments – Post Your Own

#1) On August 07, 2008 at 2:20 PM, colonelnelson (43.66) wrote:

Great post as always, Deej.

On the topic of shipping, Eagle Bulk Shipping, Inc. (EGLE) is getting hammered today and may also be worth a look. 

They had a favorable write up in Barron's a week ago.

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#2) On August 07, 2008 at 2:51 PM, AnomaLee (28.64) wrote:

While I was reading I was hoping you would post the picture -- look at Ronald...

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#3) On August 07, 2008 at 2:54 PM, mandrake66 (78.05) wrote:

Agreed, great post as always. I've been looking to get into Diana Shipping (DSX) for months now but it never quite gets down to my buy point. I regret letting it get away from me back when it was around $26.

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#4) On August 07, 2008 at 3:14 PM, TMFDeej (99.27) wrote:

Thanks for the comments everyone.  Man, Ronald McDonald is one creepy looking dude, isn't he?

Deej

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