Trader Talk

Goldman Raises Estimates on Fertilizer Cos.

Wal-Mart reported earnings ($0.97) a penny above consensus and raised full year guidance to $3.95 to $4.05 (from previous $3.90 to $4.00), but U.S. same store sales, down 1.8 percent, is definitely a disappointment (guidance was from down 2 percent to up 1 percent).

This is going to be one nail-biter of a back to school season.

It looks like the consumer is going to buy VERY LATE (it's really hot, and Labor Day comes late), and will again be looking for deep discounts.


1) Other retailers are reporting — outlooks for the rest of the year remain cautious. With slowing sales growth ahead, retailers are still having to rely on cost cuts and better inventory management to boost their bottom line.

a) TJX reported earnings and revenues in line with expectations, raised full year guidance (to $3.27-$3.37) but is still at the low end of consensus of $3.37. Sees flat to negative 1 percent decline in same store sales in the second half.

b) Home Depot rises 2 percent after Q2 earnings beat estimates by a penny ; a 3 percentage point improvement in margins. However, just like Wal-Mart, sales growth missed Street estimates as same-store sales in the U.S. (up 1 percent) trailed growth overseas. Spending remains tepid: although traffic rose slightly, average ticket price remained fairly flat (up just 0.1 percent).

The home improvement retailer raises full-year earnings guidance to $1.90 vs. $1.89 consensus, but that comes as it lowers its sales growth forecast to 2.6 percent, down from its prior 3.5 percent outlook.

c) Saks rises 2 percent after reporting a narrower-than-expected loss (loss of $0.13 vs. loss of $0.17 consensus) amid a 4.6 percent rise in comps and expanding margins.

The upscale department store notes that the economic outlook "remains uncertain" and the retailer remains conservative for the remainder of the year. Comps are still seen rising mid single digits in the second half.

d) Abercrombie & Fitch is down fractionally despite beating estimates ($0.24 vs. $0.16 consensus). The teen retailer posted a 5 percent increase in same-store sales, led by an 8 percent rise in comps at its namesake stores — which outpaced more modest gains at its abercrombie kids (up 3 percent) and Hollister stores (up 2 percent).

Despite the good results, one issue for the chain: lower pricing cut into gross margins while general expenses also increased.

More workers head to the unemployment line: In continued efforts to reduce their cost structure, both Saks and Abercrombie announced more store closings this year. Saks revealed it will close 2 stores in Texas and California over the next 2 months (after 3 store closings last month). Meanwhile, Saks announced it would close about 60 stores this year — with the bulk of the closings occurring at the end of the year.

2) Potash has rejected an offer of $130 per share from BHP Billiton as inadequate. Since it is currently trading at $145, the Street seems to think BHP will raise its bid — at $145, that is a 30 percent premium to yesterday's close (in line with average M&A premiums paid in the sector over the last 5 years, according to Citigroup).

No surprise that BHP wants to make a large acquistiion (remember the Rio Tinto bid?). The agriculture business is surging worldwide, even though potash prices are not, and other mining companies like Vale and Rio Tinto have also expressed interest in expanding into agriculture.

Goldman Sachs this morning raised estimates and price targets on the big fertilizer names due to healthy global demand trends and pricing momentum.

By the way, the largest pure-play potash producer in North America is not Potash, it's Intrepid Potash , which also traded up about 12 percent pre-open.

Mosaic also up 12 percent pre-open (remember Cargill owns a 66 percent interest in this company), Agrium up 6 percent, CF Industries up 8 percent pre-open.

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