Updated from June 25.
Editor's note: Today, Tyson Foods (TSN) - Get Report and Kraft Foods( KFT) announced their latest quarterly earnings, with the rise in commodity prices a key factor in both companies' results. While Tyson's profit dropped, Kraft's profit rose.In "How to Invest in Food Stocks: The 'Middleman' Plays" and "How to Invest in Food Stocks: Restaurants," RealMoney contributor Scott Rothbort put Kraft and Tyson in the context of the "food investment chain."
TheStreet.com TV: Rising Food Costs, Fat Returns
David Peltier dissects the strong earnings report from Kraft Foods and offers his forecast as food prices rise.
To watch the video, click the player below:
var config = new Array(); config<BRACKET>"videoId"</BRACKET> = 1695582016; config<BRACKET>"playerTag"</BRACKET> = "TSCM Embedded Video Player"; config<BRACKET>"autoStart"</BRACKET> = false; config<BRACKET>"preloadBackColor"</BRACKET> = "#FFFFFF"; config<BRACKET>"useOverlayMenu"</BRACKET> = "false"; config<BRACKET>"width"</BRACKET> = 265; config<BRACKET>"height"</BRACKET> = 255; config<BRACKET>"playerId"</BRACKET> = 1243645856; createExperience(config, 8);
In the following article, Rothbort covers five companies that have also recently reported earnings and how they have been impacted by the rise in commodity prices.
As we all know, commodity costs have been on the rise. With the second earnings season of 2008 ("
Get in Shape for Earnings Season
") in full swing, let's take a look at how American companies have been affected by the commodity boom.
runs two different divisions: Boeing Commercial Airplanes (BCA) and Integrated Defense Systems (IDS). BCA has developed the new more energy-efficient passenger airplane, 787 Dreamliner. Orders for the Dreamliner have helped Boeing's backlog of new orders surge to record highs.
Unfortunately, Boeing has failed to delivery its new product, and continued delays and project mismanagement have led to increased costs. So when will the company reap profits from the fuel-efficient Dreamliner? It might not be until Boeing actually tests Dreamliner in-flight in the fourth quarter of this year
until it delivers its first plane in the third quarter of next year.
In the meantime, Boeing is being hurt by rising fuel costs, as U.S. domestic carriers are faltering. Many airlines are not placing new orders, filing for bankruptcy or cutting routes. As a result, it is possible that Boeing will have a significant inventory of unused (
) aircraft on the market.
is one of the premier oil and gas equipment and services companies in the world. As energy prices have soared, the need to drill for more sources of oil and gas have increased. Schlumberger reported second-quarter 2008 earnings per share (EPS) of $1.16 on revenue of $6.76 billion. Income from operations rose 9% sequentially and 13% year-over-year to $1.42 billion. To put these numbers into perspective, the company was
to earn $1.12 per share on revenue of $6.48 billion. In the same quarter last year, Schlumberger earned $1.02 on revenue of $5.64 billion.
Simply put, Schlumberger is seeing strength in demand for its products, and its profit margins have improved in all geographic markets (with the exception of Canada). This should come as no surprise, as the price of crude oil has skyrocketed from about $70 a barrel only a year ago. That said, whether crude is at $100, $120 or $140, we still need to get more of it out of the ground, as demand remains and supplies are dwindling.
Schlumberger and analysts are expecting stronger company growth in 2009 -- somewhere around 20% or better. Look for more Schlumberger rigs to go online in the second half of 2008 and in 2009. Clearly, Schlumberger is a long-term beneficiary of the rise in energy costs.
This earnings season,
beat analysts' consensus EPS estimates by 1 penny, as it earned 29 cents. In the same quarter last year, Hershey's earned 35 cents. Revenue was $1.11 billion versus estimates of $1.08 billion and year-ago sales of $1.05 billion. There is clearly an anomalous condition as sales rose while earnings declined. The sales figures are somewhat deceptive, as Hershey's is passing on its commodity cost increases -- primarily wheat, sugar and other "food stuffs" -- to the consumer. However as we see, earnings declined as the company has had to absorb more commodity costs than the company was able to pass on to consumers.
Hershey's is one of those stocks that is traditionally considered a "safe haven" investment in a slowing economy, but due to high food and energy prices, it has turned out to be disaster. This goes to show you that you have to analyze stocks independent of their general sector designation. And as always, you need to look beyond the headlines and analyze the quarterly results from top to bottom.
Earlier this week,
Freeport-McMoRan Copper & Gold
, a mineral exploration, mining and production company, reported EPS of $2.25 on revenue of $5.44 billion. Analysts were expecting the company to earn $2.43 per share on revenue on $5.27 billion. So what went wrong during a period of rising metal prices?
In the company's quarterly presentation, a table was provided that offers detailed information on price realization (average price received for sales) and unit volumes. I have summarized this data below:
It is clear from this data that the company was not able to take advantage of higher commodity costs as volumes in gold dropped dramatically. The company attributed this shortfall to so-called issues at one of its mines.
Freeport-McMoRan also presented its sensitivity to commodity prices. Net income will be affected as follows:
Copper prices +/- $0.20 per pound equates to a $490 million impact to net income
Molybdenum +/- $2.00 per pound equates to a $100 million impact to net income
Gold +/- $50 per ounce equates to $45 million impact to net income
As we see above, a mining and exploration company can be impacted by both commodity prices and commodity volumes.
To listen to Freeport-McMoRan's recent earnings conference call,
recently reported EPS of $1.04 on revenue of $6.075 billion. Analysts were expecting the company to earn 86 cents per share on revenue of $5.92 billion.
McDonald's is an interesting case study in commodity costs.
On one hand, as consumers are faced with rising energy prices, they have less disposable income to apply toward discretionary purchases like restaurants. However, as McDonald's is on the low end of the price spectrum for restaurants, it has attracted diners away from the competition with its "Dollar Value Meals" and low-priced coffee. Clearly, consumers would prefer to buy coffee from McDonald's rather than from the premium-priced
. In academia we refer to this as the Substitution Effect.
On the other hand, McDonald's is not immune to the costs of its raw inputs -- food. Margins declined slightly in the second quarter as chicken and beef costs rose. These commodity costs are expected to rise further in the second half of 2008, putting some fear into McDonald's ability to maintain its margins in the second half of the year. To McDonald's benefit, is the company's "vertical management" of its commodity costs -- from farm to final processing. Furthermore, the company does not have its food costs concentrated in any one food type. For example, beef is the company's largest food cost, yet it comprises only 15% of its total food costs.
Other restaurant chains have also experienced increasing food costs reduce their margins and bottom line. Just this past week,
all reported quarters and/or guidance that reflected negative impacts from rising food prices.
Rising commodity prices can have positive or negative impacts on companies. Some business models will be able to take advantage of rising commodity costs while others will suffer. Furthermore, strategic management of one's product offerings, resources, customer prices can help to benefit from or manage commodity costs rises. As always, we need to understand the commodity chain and dig deeper into company earnings reports to gain a full understanding of the impact of commodity costs on earnings and operations.
At the time of publication, Rothbort was long SLB, FCX, MCD and YUM, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
. Scott appreciates your feedback;
to send him an email.