By Charles Rotblut
June 4, 2009
Commodity prices have been soaring. Oil, gold, copper, wheat and corn all recently hit multi-month highs. Even the Duke Brothers are making a mint on orange juice futures. A steady stream of economic data showing a slower pace of deterioration in the U.S. has been the primary driver behind the recent surge. Also playing a role is the combination of a higher tolerance for risk, weekly fluctuations in inventories, the spring planting season, the dollar and sustained growth in China. What’s interesting about the rally is that it has yet to translate into higher earnings estimates for commodity-related companies.
Wheat and corn futures recently set 8-month highs. Other agricultural-related futures have also soared, such as coffee. Profit forecasts for agricultural companies, however, have been trending lower. There are 2 reasons for the disconnect.
The first is the credit crisis. Though the Treasury Department has deemed some banks too big to fail, many smaller banks have been seized. This has created big problems for some rural communities that depend on just 1 or 2 banks. Furthermore, tighter credit conditions have made it harder for farmers to get the financing they need for planting season.
The second is the weather. Cool and wet weather systems delayed the planting of crops such as corn and soybeans. Monsanto (NYSE: MON) recently blamed the weather for hurting herbicide sales and causing it to lower full-year guidance. Obviously, the late planting season also has implications for fertilizer companies.
One glimmer of light, however, is Potash of Saskatchewan (NYSE: POT). Two analysts recently raised their full-year forecasts. The changes were not enough to move the consensus earnings estimate, but they were a step in the right direction. MON is a Zacks #4 Rank (“sell”) stock and is classified in Agricultural Operations. POT is a Zacks #3 Rank (“hold”) stocks and is classified in Fertilizers.
Since January, gold has consistently stayed above $860 per ounce. After pulling back in April, the precious metal is once again nearing the $1,000 mark.
Gold mining stocks have also rallied lately, though profit forecasts remain unchanged. In fact, the number of positive and negative revisions is about even for Mining-Gold. This was essentially the same scenario we saw in February. The lack of changes reflect a combination of uncertainty about where gold prices are headed, the impact of other metals on mining company profits (e.g. zinc) and lower production levels.
For other metals, the economy is the big issue. The worldwide recession has led to lower demand. Though optimism about a forthcoming recovery has helped send copper prices and other metals higher, the rise has not translated into better profit forecasts. Rather, the consensus estimates for AK Steel (NYSE: AKS) and other metal producers are holding steady or declining.
One notable exception is Freeport McMoRan (NYSE: FCX). Within the past month, positive revisions have pushed the full-year consensus earnings estimate 2 cents higher to $1.02 per share. AKS and FCX are Zacks #3 Rank stocks. AKS is classified in Steel-Producers. FCX is classified in Mining-Non Ferrous.
Oil & Gas Companies
Most of the profit forecast changes occurring among energy stock prices are in reaction to better-than-feared first-quarter earnings, not an improved outlook for commodity prices.
Natural gas is a big reason why. Even with the recent rally, natural gas prices are down considerably for the year. As a result, many companies are focused on controlling costs. Furthermore, they are only expanding to the extent that cash flows allow them to. Though this helps the bottom line, we have yet to see analysts truly adjust their forecasts to account for the higher commodity prices.
After last year, it’s not hard to blame brokerage analysts for being a bit cautious. During the first-half of 2008, they underestimated how high crude would climb. After the bubble peaked in July, many brokerage analysts incorrectly judged how quickly energy prices would plunge.
Our energy analyst, Sheraz Mian, advocates looking at oilfield service companies as a way to play the rise in energy prices. Among the stocks he has long-term buy ratings on is Weatherford (NYSE: WFT). WFT is a Zacks #3 Rank stock classified in Oil Field Machine & Equipment.
Commodity-Related Stocks Now Riskier
The lack of positive revisions implies that the risk of owning commodity-related stocks is high. Valuations have increased notably as the higher stock prices have not been matched by a better earnings outlook. At the same time, commodities have staged a strong rally and it’s hard to say how much upside is left. Though agriculture commodities may be influenced by the late planting season, energy and metal futures may need actual signs of higher demand to extend their rally.
Charles Rotblut is the Vice President of Web Content for Zacks Investment Research and the Senior Market Analyst for Zacks.com. He oversees the editorial staff, manages the market-beating Focus List, Timely Buys and Top 10 portfolios, and plays an instrumental role in the development of new products. For more information, visit http://www.zacks.com.