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Two industries that reside in the "Land of Make Believe" / Quick Hits



July 30, 2008 – Comments (1) | RELATED TICKERS: TSN , COP , BWLD

Checking in from day three of my stay-cation.  Yesterday I took the family to an amusement park called “The Land of Make Believe.”  With a name like that, I kept looking around for Big Ben Bernanke’s Helicopter ride and strong man wearing a Paulson costume and carrying a huge dollar.  Despite the fact that neither of these things were anywhere to be found we had a great time.

Companies in two industries seem to have been making frequent trips to the Land of Make Believe lately, refiners and chicken producers.  The companies that comprise both of these industries are completely out of touch with reality.   None of them are cutting production fast enough and they are getting killed by low profit margins.  Refiners are have been absolutely crushed as they continue to produce gasoline (refinery utilization was actually up this week) in the face of high oil prices and reduced consumer demand for gas. 

Chicken producers are getting hammered as well.  Despite the massive recent pullback in the price of corn, it is still above year-ago levels.  Several months ago I hypothesized that high corn prices would eventually lead chicken producers to cut production as their margins plummet, causing the price of chicken to rise and in turn hurt restaurants.  This theory has yet to play out (though many poorly run restaurants are getting destroyed by a slowdown in consumer spending) because meat producers are playing a dangerous game of chicken (pardon the pun :) ), with everyone hoping that other companies cut back on production first.  So far, no one has blinked and chicken prides remain well below year ago levels despite high input costs.  So, for how restaurants have been cut a break and chicken producers are feeling the pain.

I covered every single one of my real-world short positions, including multiple ones in chicken producers and restaurants, a couple of weeks ago after making 20% to 30% on them.  I decided not to be greedy and thought that the markets were due for a good bounce.  I’m glad that I did because many of them are well above the levels that I closed out at.  Tyson Foods Inc. (TSN) warned shareholders early this week that its U.S. chicken business it taking longer than expected to recover from high feed costs (see article: Tyson Plucked by Chicken Feed Costs).  TSN’s margins in its chicken division during the quarter dropped to negative 2% from positive 4% during the same period last year. 

In fact, the company’s president and CEO went a step further and cautioned that the viability of the U.S. chicken business was under threat.  Tyson had originally hoped that its chicken division would return to profitability during the fourth quarter of this year.  It now believes that it will report a larger loss in Q4 than the $44 million loss that it reported in Q2.  The day that it reported this dismal news, Tyson’s shares dropped by over 6%.

Tyson also announced that it has entered into a joint venture to produce biodiesel from animal byproducts with one of the companies that I currently own, ConocoPhillips Inc. (COP).  While I don’t expect much in the way of profits to come from this, it is interesting.



Quick Hits

Buffalo Wild Wings Q2 profit beats Street; shares rise:  I have to hand it to BWLD, the company hit a home run with its recently results (I sure am glad that I covered my real world short a while ago).  Its quarterly profit rose an eye-popping 46%, and beat analysts’ estimates by $0.04, sending its shares soaring 6%.  The average weekly sales rose an impressive 10.7% at company-owned locations and 5.4% at franchised restaurants during the quarter.  Very impressive.  Thus far in July, things have slowed down a little bit, with company-owned locations reporting 6% growth and independent locations reporting 2%.  If chicken producers do ultimately cut production, chicken prices will rise.  This combined with slowing consumer spending, which can even be seen in BWLD’s own reported numbers, may eventually catch up with even this well run restaurant operator.


Conoco Joining Super-Majors:  Zacks recently published a bullish piece on the aforementioned ConocoPhillips calling it the newest of the “super-major” oil companies.  As I have mentioned in the past, I am long COP and I’m very bullish on the company as well.  

Projected residual values of trucks, SUVs fall:  Automotive Lease Guide Inc., the independent company that many banks rely upon to set “realistic” independent residual values for leased vehicles, has decided to lower its estimates for the future values of trucks and raise them for small cars.   Specifically its resides rose by an average of 5% for small cars, including hybrids, and fell by a whopping 8% for full-size pickups and full-size / midsize SUVs.  Ouch.  This means that it is going to become increasingly expensive for consumers to lease trucks and that consumers who want to trade-in their trucks on something new are going to take a huge hit.  Neither bodes well for the future demand for trucks, which was once the main profit center for domestic automakers.  They will continue to struggle as they realize losses on their captive finance companies’ lease portfolios and until they can adjust their production mix to smaller vehicles. 

Ken Heebner: Best Fund Manager Alive?:  Another glowing Ken Heebner article.


Long COP 

1 Comments – Post Your Own

#1) On July 31, 2008 at 4:11 PM, DonBWalker (< 20) wrote:

Where do you see anything in BWLD's own reported numbers that consumer spending is dropping for them?  Same store sales were outstanding and new store opening were strong enough to drive average store sales higher.  I have no idea why you would short this stick other than to take advantage of some short term dips.  This management team delivers.

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