BlastInvest
Blast Investor Real-time Plus           by Henry Lu

China Slowdown, GKIS NRG CEI CHK EXX ADGO

05/15/2005


Stock market continues to be tough this year. S&P500 index is down -4.78% year to date, NASDAQ is down -9.13% year to date. BIRTP model portfolio performance is back to positive ground, up 2.43% year to date, beating S&P500 by 7%.

Compared to the last newsletter issue 2 weeks ago, Stock CEI and GKIS contributed most of the last 2 weeks' gain for the BIRTP model portfolio.

Oil stocks CHK and WLL continue to struggle recently. The latest news is the International Energy Agency (IEA) report that China's oil demand growth is slowing down to only 5% annual growth rate instead of last year's double digit growth rate. This IEA oil report triggered sharp one day price drop of oil stocks including CHK and WLL.

Effect of Chinese Economic Slowdown on Oil and Steel Market

All the market recent reaction on commodities and oil price came from the slowdown news from Chinese economy. Chinese government has tightened up bank money to dampen the speculation in real estate and fixed-asset projects. The tightening in Chinese economy has shaken commodity market in the world.

The steel price in China collapsed recently, which triggered world wide steel price drop in chain reaction. The auto market slowed dramatically this year so far in China. In 2003, China had 100% year over year auto sale growth. But in 2005, China auto sale is expected to grow at only 11% or less annual growth rate. China is No.1 consumer of copper and steel in the world. Based on China's National Bureau of Statistics, China consumed one third of world steel supply in 2003. The past steel price run up was mainly due to sudden demand growth from China.

However, there is no severe steel or iron ore shortage world wide.  Once the demand from road, building, and auto is gone in China due to the government bank loan crackdown, so goes the steel price world wide. Steel is extremely cyclical commodities in that once a building or a road is built, there is no demand for more steel for the same road or for the same building. The sharp price drop of steel price is bad for US steel producers such as US steel (ticker X) or Metals USA (ticker MUSA), but is good for US steel users, such as auto parts stock Exx, Inc (EXX-A). 

Oil market is another story. The rising high oil price has been due to tight supply and demand of world oil market. There is growing demand world wide, especially from both China and USA. Currently China and USA combined consumed nearly 40% of total world wide oil supply, and their demand is still growing even in the recent IEA report. Although Chinese economic slowdown will cause less new cars to be sold in short term, the existing and growing cars and trucks continue to consume more oil fuel. According to recent IEA report, last year's energy shortage in east coast China is not expected to improve this year.  In the meantime, the world oil supply is still struggling, and is likely to hit a production peak soon due to lack of new oil fields discovery in past 40 years. In the oil market, I do not see collapse of oil price any time soon and current price drop is only short term correction. The current Chinese oil demand slowdown is not going to change the fundamental tight supply and demand of oil market in the world.

The current oil stocks including CHK and WLL are still trading on the "plenty of oil supply" assumption so that their valuation is still in single digit price to true owner's earning ratio. Majority of Wall Street analysts are still predicting cheap oil price in $20's to $30's a barrel price. The only analyst who is predicting high oil price is from Goldman Sachs. When majority do not believe in high oil price, there is no real danger of oil price bubble and I continue to be long term bullish on oil and oil stocks.

Blog board comments on Friday's sharp drop of oil stock price [ hidden link].

CHK Excellent Earning Report

Chesapeake Energy (Ticker: CHK) reported excellent earning report recently, which beat analyst estimate by significant margin.

The only confusing part of the earning report is the hedging loss incurred in Earning Per Share (EPS). Hedging loss is just an artificial effect from GAAP accounting rule. The hedging loss is really not going to affect cash flow. Because natural gas price is volatile, it is expected to have hedging gain or hedging loss from quarter to quarter. CHK's hedging program has been very successful so far because it has achieved what the hedging program is designed to do: to smooth out quarter over quarter cash flow volatility and to maximize overall year over year cash flow.  Since 2001, CHK has made 70 million gain because of hedging program.

There has been continued large insider buying from CHK's top managers indicating their confidence on the future of natural gas price and CHK business.

The recent drop of CHK stock price was partly due to normal price correction after big rally and partly due to oil demand slowdown news from China. This kind of price correction is normal and I continue to be bullish on CHK for the long term.

Blog board comments on CHK's recent earning [ hidden link ].

CEI Better than Expected Earning

Crescent (ticker CEI) reported better than expected funds from operations (FFO) of 0.25 per share, up from 0.23 FFO per share last year. CEI's office and resort real estate business has performed very well. Market reacted to CEI's earning positively with upward stock price movement after the earning report.

GKIS Earning Slapped Wall Street Analysts' Face

Gold Kist (ticker: GKIS) reported blowout earning recently. The 5 Wall Street analysts' average earning estimate in Yahoo Finance for recent quarter was 0.40 earning per share. GKIS did 0.76 earning per share, up 29 percent year over year. That is 90% earning surprise over Wall Street estimate, a serious slap over Wall Street analysts' face.

The main reason for the excellent result is just as I expected: significant saving over feed cost. Soybean and corn meal are main food for Chicken that Gold Kist grows. GKIS corn meal and soybean meal cost is down -21% and -31% year over year this quarter.

Today's commodity price of soybean and corn meal are actually down close to -40% year over year. This is all because of supply and demand. According to US Department of Agriculture (USDA) data, supply of soybean and corn is expected to continue to be larger than demand in 2005. The high price of corn and soybean last year was abnormality rather than norm.

On the chicken price side, the chicken meat price is slightly down year over year. The current chicken broiler commodity price is down 7% year over year. With corn and soybean meal price went down faster than that of chicken meat, GKIS earning looking forward later this year is very promising.

GKIS continues to be dirt cheap based on its price to earning ratio and valuation comparison to its competitor Pilgrim's Pride (ticker PPC) and Sanderson Farms (ticker SAFM). My plan is to continue to hold this stock for the long run until its valuation catches up with its peers.

NRG Worth $47-$50 per Share

NRG reported excellent earning recently with better outlook for 2005.  The coal cost for 2005 and 2006 are mostly hedged while the upside from electricity price is maintained.

Below is the new number for 2005 outlook:
Previous expected 2005 EBITDA:  $620 million
Current 2005 EBITDA outlook: $710  million
( adding $30 million cost saving and $60 hedging gain reported in 2004 but should be applied to 2005):
Exclude 2005 one time EBITDA: $20 million
Net Adjusted 2005 EBITDA: $690 million.
Market Cap: $2.77 billion at $31.8 per share
Total Debt + Preferred stock: $2.57 billion.
EV/EBITDA:  7.7x
2005 interest payment: $231 million
Capital Expenditure:  $114 million
Adjusted pro forma free cash flow for 2005: $327 million or $3.8 per share

At 10x multiple of EV to EBITDA ratio valuation, NRG is worth $50 price per share. At 10x multiple of free cash flow plus cash valuation, NRG is worth $47 price per share.

Based on recent excellent earning report, my target for NRG is raised to $47 per share to $50 per share price. NRG is significantly under-priced at $31.8 price per share.

EXX and ADGO Sell Off

Exx, Inc (Ticker EXX-A and EXX-B) and Adams Golf (Ticker ADGO) stock sold off significantly over past few months. Both reported decent earning report recently.

ADGO was trading as low as $1.10 and now at $1.18. It is still trading around its book value. The balance sheet of ADGO is excellent with large cash and no debt. Even if its revenue growth slowed in recent quarter, ADGO still is very profitable and well-run company.

Exx, Inc had announced large deal with DaimlerChrysler, which will compensate the pending loss of revenue with American Axle & Manufacturing. American Axle & Manufacturing is sole parts vendor for GM. Exx, Inc has pretty large business with DaimlerChrysler in diesel related auto parts. My take from the new deal is that Exx is moving away from GM car and truck business and into more and more diesel auto parts business.

Diesel is more efficient energy source than regular gas fuel. President Bush is pushing for an energy bill to encourage diesel cars in USA. If the new energy bill passes, there will be more positive Exx diesel business in the future.  Please click here for my comments on Exx new deal in Blog board [ hidden link ].

Exx also reported declining quarter earning report recently. The main reason for the earning drop is due to weakness in Plastics and Rubber division serving the auto industry, which constitute 20% of total gross profit this quarter. The majority of Exx business is in machine equipment division, which is actually doing pretty good with year over year revenue growth and gross profit growth.

With sharply dropping steel price and new auto parts deal with DaimlerChrysler, I am optimistic on the turnaround of Exx, inc business.

With dirt cheap stock price of EXX-A and ADGO, my approach is to sit on the shares and wait for future price rise. Because my investment strategy is long term oriented value investing,  I will only want to sell cheap stocks like EXX-A ADGO when they reach or approach their worth.



Blast Investor Model Portfolio Update

(as of 05/15/2005)

Model Portfolio - Performance


Portfolio inception date
 12/31/2003
Portfolio inception value
 $89,000
Portfolio 12/31/04 value
 $141,981.00
2004 SP&500 Performance 8.78%
2004 Portfolio Performance 59.53%
2005 SP&500 YTD Performance -4.78%
2005 Portfolio YTD Performance
 2.43%


Model Portfolio - Open Positions
Symbol Last Shrs Value Paid Gain
ADGO.OB 1.18 9,000 $10,620.00 0.78 $3,590.00 +51.07%
CEI 17.70 1,500 $26,550.00 16.63 $1,585.00 +6.35%
CHK 18.40 1,100 $20,240.00 13.90 $4,940.00 +32.29%
EXX-A 1.55 6,500 $10,075.00 1.638462 -$595.00 -5.58%
GKIS 17.58 1,500 $26,370.00 15.68 $2,840.00 +12.07%
LIBHA.PK 5.40 1,200 $6,480.00 5.10 $350.00 +5.71%
NRG 31.80 335 $10,653.00 23.05 $2,921.25 +37.78%
SOHU 16.65 700 $11,655.00 24.882857 -$5,783.00 -33.16%
USG 42.48 950 $40,356.00 18.425789 $22,831.50 +130.28%
WLL 29.15 600 $17,490.00 22.683333 $3,860.00 +28.32%
$$CASH -35,056.3 -$35,056.30 - - -
11 symbols Total(USD):
$145,432.70




Model Portfolio Transactions
Date  Type Symbol Shares Price Comm Amount Notes
Feb 28, 2005 Buy GKIS 1,500 15.68 10.00 23,530.00
-
Feb 28, 2005 Sell NTES 150 41.88 10.00 6,272.00 +14.22%
Feb 25, 2005 Buy CEI 500 16.39 10.00 8,205.00
-
Feb 25, 2005 Sell NRG 335 38.42 10.00 12,860.70 +66.57%
Jan 31, 2005 Buy CEI 1,000 16.75 10.00 16,760.00
-
Nov 24, 2004 Sell HRB 350 47.35 10.00 16,562.50 - 12.31%
Nov 4, 2004 Sell NTES 100 46.50 10.00 4,640.00 + 27.05%
Oct 19, 2004 Buy EXX-A 1,500 1.60 10.00 2,410.00
-
Oct 6, 2004 Buy EXX-A 5,000 1.65 10.00 8,260.00
-
Oct 6, 2004 Sell NEN 100 80.00 10.00 7,990.00 + 48.15%
Oct 5, 2004 Buy USG 250 18.75 10.00 4,697.50
-
Oct 5, 2004 Sell NTES 100 39.12 10.00 3,902.00 + 6.9%
Sep 30, 2004 Buy USG 700 18.31 10.00 12,827.00
-
Sep 29, 2004 Sell NEN 100 79.65 10.00 7,955.00 + 47.5%
Aug 5, 2004 Buy WLL 250 23.50 10.00 5,885.00
-
Aug 2, 2004 Sell NEN 100 69.95 10.00 6,985.00 + 29.5%
Jun 17, 2004 Sell HCA 250 40.30 10.00 10,065.00 - 4%
Jun 17, 2004 Buy NRG 670 23.05 10.00 15,453.50
-
May 24, 2004 Sell ADGO.OB 13,000 1.55 10.00 20,140.00 + 98.7%
May 10, 2004 Sell HCA 250 39.97 10.00 9,982.50 - 4.8%

Date  Type Symbol Shares Price Comm Amount Notes
May 10, 2004 Buy SOHU 200 15.59 10.00 3,128.00
-
Mar 5, 2004 Buy WLL 350 22.10 10.00 7,745.00
-
Jan 26, 2004 Sell WRP 700 17.40 10.00 12,170.00 - 5%
Dec 31, 2003 Buy CHK 1,100 13.90 10.00 15,300.00
-
Dec 31, 2003 Buy NEN 300 54.00 10.00 16,210.00
-
Dec 31, 2003 Buy HRB 350 54.00 10.00 18,910.00
-
Dec 31, 2003 Buy NTES 350 36.60 10.00 12,820.00
-
Dec 31, 2003 Buy SOHU 500 28.60 10.00 14,310.00
-
Dec 31, 2003 Buy LIBHA.PK 1,200 5.10 10.00 6,130.00
-
Dec 31, 2003 Buy ADGO.OB 22,000 0.78 10.00 17,170.00
-
Dec 31, 2003 Buy HCA 500 42.00 10.00 21,010.00
-
Dec 31, 2003 Buy WRP 700 18.30 10.00 12,820.00
-
Dec 31, 2003 Cash In -
-
-
-
 89,000.00 Inception