Flash Alert: Bunge Update

Yesterday, Wildcatter Portfolio holding Bunge (NYSE: BG) reported earnings and held its fourth quarter conference call. The company missed fourth quarter estimates by approximately $0.05 and then proceeded to guide slightly higher for 2006. The stock did not react well to this news despite the improved guidance, falling approximately 5 percent on the session.

Based on my analysis of the call and release, I’m not changing my recommendation. I continue to view Bunge as an excellent play on the growing biodiesel market.

Bunge’s slight miss was really not the issue in the fourth quarter; management had already made it crystal clear that the quarter would be weak. The real problem was one of earnings quality: Bunge’s results would have been far worse had the company not been able to book a huge tax benefit. The company’s tax rate for the quarter dropped significantly from what it considers a normal rate.

Obviously, investors are concerned that Bunge won’t be able to maintain this benefit in 2006. Furthermore, it appears that the company would likely have lost money in its Brazilian fertilizer operations in the quarter had it not been for that tax break. Investors rightfully would rather see earnings flow from actual operations not tax-related management.

But in Bunge’s case, we should give some credit to the company for its tax break. The primary weakness for Bunge stemmed from the appreciation of the Brazilian real last year. As I outlined in the January 25 TES, Food For Thought, the approximate 20 percent move in the currency squeezed farmers and left Bunge sitting on a pile of fertilizer inventory.

Management has been very forthcoming in admitting it should have been more aggressive in hedging its currency risk; in yesterday’s call they admitted to these mistakes. Once it was clear last year that the currency was going to hit earnings, Bunge undertook some tax-related restructuring to help offset and hedge currency. This was both perfectly logical and legal; when the Brazilian real appreciates, hurting their base business Bunge is able to offset that with some tax reductions. This does not seem a valid reason to punish the stock.

Looking forward into 2006, management seems to have used the fourth quarter to truly purge itself of all the bad news and potential issues. The company liquidated most of its fertilizer inventories; inventories in the country stand some 20 percent below last year. Bunge also fired some staff and idled some of its higher cost facilities. This coupled with a more aggressive currency-hedging scheme should substantially reduce earnings volatility and costs for this year.

If the Brazilian real is stable or depreciates this year, there is a significant probability of an upside surprise. The company’s guidance appears very conservative.

At the same time, the growth story remains intact. Bunge confirmed that biodiesel related demand is a big growth driver, particularly in Europe where the EU is mandating a massive increase in biofuel consumption. The company owns some biodiesel plants directly via a joint venture but that’s only half the story; Bunge also has sited its biodiesel plants next to the company’s own crushing facilities. Bunge benefits too from higher crushing margins.

Bottom line: The fourth quarter marked the worst for Bunge. Going forward business conditions are likely to improve albeit at a gradual pace. The biodiesel demand story is totally intact.

American Commercial Lines

Trade recommendation American Commercial Lines (NSDQ: ACLI) also reported earnings yesterday. The stock offered a positive surprise and shot higher about 8 percent on the session. The stock is now up roughly 24 percent from my November 30 recommendation. For those unfamiliar with the story, American Commercial is a barge operator; the company’s barges are used to transport products like grain and coal in and around the US. Hauling rates for dry cargoes shot up 24 percent in the quarter over the year ago period.

The barge market is not getting the same attention as the railroads even though both are key components of transporting coal around the US. I’m raising my “buy under” price on American Commercial to 35 and I recommend tightening your stops to 29.50 to lock in a breakeven on the stock.

Stop Adjustments

Raise your stops on BG Group (NYSE: BRG) and Total (NYSE: TOT) to 50 and 122, respectively. Both are up from my original recommendation, with BG up more than 50 percent.

I’ve long considered BG a takeover target, but the market is just now starting to catch on to that story and the speculation is getting extreme. It’s time to tighten stops and lock in big gains.

Asian Opportunity

The energy markets are only one small way to profit from Asia’s growth. Investors who truly understand Asian markets and the geopolitics of the region have an opportunity to get in on the ground floor of what will be the most impressive secular bull market of the 21st century. There is no one better qualified to guide investors on this quest than my friend and colleague Yiannis Mostrous.

Yiannis has launched a new e-zine on Asia, The Silk Road Investor.

I’ve worked closely with Yiannis for five years now and know first-hand how profitable his recommendations have been. He was one of the first advisors I know to understand and discuss India’s tremendous growth prospects, recommending stocks like HDFC Bank way back in early 2003 before the stock shot up over 203 percent. He was also early in Russia, recommending a slate of stocks that produced similarly impressive gains for investors.

Equally important, Yiannis knows how to cut through all the hype surrounding emerging markets to uncover the true gems. He’s avoided several over-hyped Asian plays that ultimately cost investors money.

I encourage all subscribers to read Yiannis’ take on Asia.

Anaheim Show

Last, but hopefully not least, I’ve received several e-mails from subscribers saying that I don’t notify early enough about shows and conferences I plan to attend. This time, I want to give an early heads-up on the Anaheim Wealth Expo to be held at the Hyatt in Anaheim, California March 30 through April 1. I’ll be speaking on a variety of energy-related topics.

You can see the details of the show and register by visiting www.worldforumexpo.com. Be sure to mention that you’re with The Energy Strategist. And drop me an e-mail at energystrategist@kci-com.com if you might be interested in a subscriber dinner one night during the show; I will keep you in the loop.

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