Bunge’s Bungee

February 09, 2009

Agricultural company Bunge reported terrible, terrible earnings last Thursday, and the stock popped up like a cork. Huh?
  • The importance of forecasts
  • Bunge's future exposure
  • Soybean expectations

 

Bunge Limited (BG) pulled off a bit of investor relations magic on Thursday. Even though it announced a fourth-quarter loss of $210 million ($1.89 per share), its stock price jumped from 42.19 at the bell to a high of 49.73 before closing at 49.07 – a one-day jump of 16%.

 

 

 

 

BG managed to hold that increase, and even improve upon it slightly through Friday's market close to end at $49.85. When seemingly paradoxical moves like this happen in commodities, there's always a kicker, and this one's worth exploring.

 

What Happened?

Bunge (pronounced like the death-kissing bridge-diving "sport") is an agribusiness company that is involved in grain and oilseed origination – basically the purchasing, handling and sale of grain and oilseed products. It also does oilseed processing and, beyond selling the oils, sells products such as soymeal and other grains to livestock/poultry producers and animal feed manufacturers. They've also got a milling business where wheat and corn are milled for food producers.

But perhaps most interesting (and relevant in this case) – Bunge is the largest fertilizer manufacturer in South America. In the fertilizer business, Bunge plays the role of a financial institution as well, allowing farmers to pay for fertilizer with future crop production.

Given that it operates in agricultural commodities, and the beating that those sectors haven taken since this past summer, analysts were well prepared for bad news. Bunge had just issued an earnings warning on January 13 revising its 2008 earnings down to $7.70 from October's guidance of $11.60 to $11.90 a share, citing reduced demand. The market reacted predictably. Bunge's stock price dropped almost 14% in one day (from $48.17 to $41.61).

 

 

 

Based on that rather dramatic shift in expectations, the number analysts were predicting for the fourth quarter was a per-share loss of 29 cents – excluding any one-time items. What they got was a fourth-quarter loss of $1.89 per share – or a net loss of $210 million for the quarter. But when you take into account the one-time charges that totaled $190 million (or $1.56 per share) for the quarter, the analysts weren't too far off. The earnings per share excluding one-time items came in at $0.33 per share – still a miss, but not earth shattering. Still, this was the first loss the company had posted since becoming public in 2001. And a huge percentage of the reported losses come from non run-rate business factors: $185 million for changes in provisions for counterparty risk, $225 million in foreign exchange losses thanks to the Brazilian real, $50 million in provisions to cover new tax laws in Brazil, etc.

So even though the company missed the mark by a large margin, the market not only didn't blink, it bought.

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