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Corn Products (CPO) CEO Samuel Scott said in a conference call with analysts. “We were able to get prices through in the areas where we did not have fixed prices sooner than we anticipated.”

The company’s sweetener products, such as high fructose corn syrup, or HFCS, account for 55% of sales in all three of its segments. The #1 US producer in the US and worldwide is Archer Daniels Midland (ADM). Starches and co-products, such as corn oils and feed, make up the rest of the company’s products. Corn Products, the number 4 HFCS producer in the in the U.S. said it’s ability to pass along corn price increases to its customers faster than expected helped profits. .

Another major factor was the elimination of a 20% tax on US HFCS being imported to Mexico. The tax shut down a big chunk of the market overnight for U.S. exports of HFCS as well as bulk corn for HFCS production by U.S.-owned firms, said Corn Refiners Association spokeswoman Audrae Erickson.

The tax was ruled illegal and was repealed. Last summer, NAFTA reached an agreement to send up to 500,000 metric tons of HFCS into Mexico from October 2006 to December 2007. NAFTA’s full, free-trade agreement opens up a huge soft drink market to many corn refiners.

Assuring the use of HFCS in the US, Coca-Cola came out and said they were disappointed with their North American results and wanted to drive Coke Classic again. HFCS is the sweetner used in these non-diet drinks. With the South American ethanol boom increasing sugar prices, soft drink makers have no alternative but to swallow any price increase corn processors decide to pass onto them.

More good new for ValuePlays Portfolio member ADM, up 16% since my January recommendation. With gas prices surging, ethanol is very profitable desipite corn’s price increase. We now know that corn food processors are able to pass along this additional cost to buyers also. When you consider the additional demand from Mexico coming online soon, it looks like more demand induced upward pricing pressure will benefit corn processors. After all, what alternative product do HFCS users have? The answer? Nothing…

ADM will be ringing the registers

In September last year I bought shares of then Citigroup, now just Citi (C). I bought them because at the time they were trading at about 10 times earnings and had a dividend yield of over 4%. I paid $48 and change a share and then turned around it would appear and sold to them to greatest value investor of my generation, Eddie Lampert in December for $54 a share and a 12.5% gain in roughly 3 months. So why am I upset?

I am upset because I seem to have had this almost pathological inability to listen to myself prior to this blog. Had I not sold, my gain on the stock currently would have been 14.5%, plus the 2% in dividend checks I would have received for a total return of 16.5%. The pain here is felt even more when you consider after taxes my original gain is reduced to 8.25%!!

So, why did I sell them? I like businesses I can easily understand whether it be selling paint, cigarettes, insulation, clothes etc. Citi is massive and about as complex an international operation as there is out there. While it was (and apparently still is) “cheap”, “cheap and “value” are not the same thing. There are plenty of “cheap” stocks out there that are so because the underlying business just sucks, period. Here is where I went wrong. Citi has a great underlying business, it is just poorly run. That makes it’s cheap price a value once CEO Prince either gets his act together or is shown the door. Citi also would have paid me over 4% a year in a dividend to wait for either of these eventualities. Not a bad deal in retrospect. Fundamentally I saw this which is why I bought shares to begin with, I just was not convinced so I took the quick money.

Don’t get me wrong, 8% after taxes in 3 months is nice, but, making small mistakes can eventually lead to larger ones. In an interview I gave with Geoff Gannon, I said my biggest mistake as an investor has not been picking losers, but not being confident enough in my reasoning and leaving too much money on the table. Read it here. In other words, making very good instead of great returns.

Blogging seems to have cured that as my format and interaction with readers does force me to constantly evaluate and explain my reasoning and methodology. It has lead to a more intimate understanding of my picks and pans and has to date cured the “doubting Todd” side of me.

I know what you are saying, “Citi only trades at $55 a share now, the difference is only $1 from your sales price” True, but my total return is 1/2 of what it could have been. Funny how things like that work, huh?

So, what to do now? Lick my wounds and go back at it. What else is there? Life is about living and learning and if you stop doing either you can’t do the other. There was a great quote I heard once and if anyone knows who said it let me know so I can credit them, “there is no shame in making mistakes, just not learning from them”

Lesson Learned

PS. Eddie, can I have my shares back?

Recently word has been circulating that there may be a buyout offer for Archer Daniels Midland (ADM) in the not too distant future. Let look at the possibility and price.

Currently ADM has a market cap of $25 billion and annual sales of $40 billion. It is the one of the world’s largest processor of HFCS, ethanol, bio-diesel, cocoa and oil seeds. It does business in 35 countries and has over 26,000 employees. Shares currently trade at 15 times this years earnings and 14 times forward earnings. ADM has grown earning 21% in 2005, 40% in 2006 and should hit 21% in 2007 (year end June). After years of leaving analysts and Wall St. in the dark about earnings, former CEO G. Allen Andreas commented before he retired last fall that the current unprecedented expansion will “substantially add to earnings in 2008”. This is the first comments I have every heard an Andreas publicly mutter on earnings. Current CEO Patricia Woertz commented on the latest earnings call that she was “more enthusiastic about the future” of ADM than ever before.

That being said, if insiders are this optimistic at a company that has a storied history of playing it’s cards closer to it’s chest than la cosa nostra, one must imply from this that 2008 is shaping up to be a very good year. Current estimates have ADM increasing earning next year only 9% in part due to the rise in corn costs. Yet the empirical data coming out suggests that this, far from being an issue may actually lead to more profits. In the most recent call ADM said despite corn costs rising, corn processing earnings increased 15% . Other ethanol producers also experience similar results. Recently, Corn Products (CPO), who produces no ethanol, only HFCS and other corn products commented that they have easily been able to past cost increases along to end users. The reason? The economics of corn are such that end users of its byproducts have no substitute for them. When you consider that 500,000 extra tones of HFCS will be sold into Mexico annually beginning in the fall of 2007, you have this increased demand further pressuring prices upward. Corn processors are also in the unique position to be able to easily hedge against price spikes, further insulating them from their effects.

Production increases mean ADM will increase it’s ethanol production 50% by 2008, it biodiesel production will double and it will add substantial cocoa production in the US. HFCS production can be increased without the building of new facilities so the option to maximize anticipated demand increases is easily attainable.

Currently June options have speculators positioning themselves to pay $40 to acquire shares before June 16th with call options out numbering puts almost 4 to 1 clearly leading to an upward bias in shares. Currently ADM has an enterprise value of $30 billion or roughly $46 a share. With managements enthusiastic expectations for 2008, any offer to buy the company would have to be well in excess of that. More realistic earning estimates for next year that put eps growth in line with the 20% increases each of the past 3 years put 2008 share price at $44 at the low end of the PE scale. All this means shareholders should expect shares to trade in the lower 40’s for FY 2008 that begins in July 2007 and any buyout offer should be at a minimum a premium to that putting shares easily into the $50 range.

Will it happen? There would be immense pressure on new CEO Woertz not to do a deal and she will likely not want to go down as the one who “closed shop” so to speak on a 115 year history by selling out to private equity, or worse, an oil company. Insiders and shareholder have visions of ADM becoming the “Exxon of Biofuels” and a buyout would quell those dreams. The only offer that may receive support would be a management buyout that allowed current holders to retain ownership in a now private ADM with current management a vision. The Andreas family had led the company for generations and as large shareholders would lead a revolt against a buyout by another firm. This anticipated hostility to an offer means it will either be avoided, or, be one that it very hard for shareholders to resist.

Either way, through results or a buyout offer, shareholders stand to prosper.

Fed Chairman Ben Bernanke said last Thursday subprime mortgage woes do not present a serious problem to the U.S. economy. Not only do they not pose a serious problemn its effects on the overall housing market would likely be limited: “Curbs [on subprime lending] are expected to be a source of some restraint on home purchases and residential investment in coming quarters.” Can we stop panicking over this now?

In March in a post I wrote “Where do we go from here? A slow decent to normalcy. That is all. Not a crash, not a recession, not a depression, just normal housing conditions with realistic lending guidelines.”

It would seem Mr. Bernanke is now echoing that sentiment. Conditions now are not dire, they are getting back to normal. A little perspective is needed. Things have been insane for quite a few years in housing and the current slow down, while it may hit some of the more careless folks out there, is very good for everyone as a whole. The more froth and speculation in any economic activity, the harder the eventual fall then becomes. Bernanke should be given credit from resisting the shrill shrieks from the Barney Franks of the world on Capitol Hill to drop rates and increase regulation in the lending market. These actions would have lead to increased volatility in all markets and the uncertainty and guessing games that would have been created could have developed into something far more serious. In doing so he has all but assured a “perfect storm” of good things for the economy. The runaway housing prices will moderate, inflation is doing the same, economic growth has not suffered, job creation remains strong, unemployment is almost non existent, the S&P and DOW are at all time highs and historically speaking, interest rates are a non factor. All this in the face of Alan Greenspan running around the Asian continent telling everyone the sky is falling

While his predecessor, Greenspan, gets far too much credit for the “soft landings” he engineered from the problems he created, Bernanke should be credited for not needing a “landing” at all, just a nice smooth ride

In a stunningly underreported event, Congress approved the blueprint for the 2008 budget and in it is the single largest personal tax increase in US history. Where is the media on this?

Passed essentially online party lines 52-40 in the Senate and 214-209 in the house, the budget blueprint plans to allow the personal income tax, capital gains and dividend tax rates to increase in 2008. Quoting House Budget Committee Chairman John Spratt (D. SC), “It’s not the perfect solution, but it is a long step in the right direction.”

How? Raising taxes has never been the answer to our “budget” problems. Cutting spending has. More money in the hands of Congress will only lead to more spending. If history has shown us anything, this is an undeniable fact. In the outline, it proposes $20 billion dollars MORE of discretionary spending than the President had proposed. How about we back out that “discretionary waste” and not pick my pocket?

Corporations have spent the last 4 years raising dividends at a 20 year record rate as a way to reward shareholders. The effect of these increases will now be negligible when the tax rate on them is allowed to almost double. Look at the chart below.

The S&P has enjoyed a smooth ride as investor have parked their money and enjoyed the steady stream of reduced tax rate dividend checks. An increase in these rates would cut the value of these dividends by almost 50% and surely lead to a huge increase in volatility. While professional traders love volatile markets, they are the enemy of the average investor who gets sideswiped by the big market swings and end up losing money.

I cannot figure out why no one is talking about this now. One thing for sure, if it passes, it will be all we talk about..

George Soros initiated holdings in Food Products company Archer-daniels-midland Co. (ADM). His purchase prices were between $30.76 and $36.72, with an estimated average price of $33.6. The impact to his portfolio due to this purchase was 1.27%. His holdings were 858,500 shares as of 03/31/2007. Shares of Archer-daniels-midland Co. were traded at around $36.69.

Soros, while I could not disagree with his politics more, I cannot argue with his track record in his investments. He is truly one of the all time greats in that department and anything he does is worth noting and following.

I have stumped for the value of ADM shares (and have held them for years) on this blog many times, the latest being here. It is always a confidence booster to know that one of the world greatest investors seems to be thinking along the same lines as you.

ADM shares, up 15% since I recommended them in Jan., are only in the infancy of recognizing their eventual value…

Could this be the beginning of the end of the lead paint public nuisance suits? At least in trials operated on a contingency basis between the government entity and a private law firm. Yesterday, President George W. Bush signed an Executive Order barring all contingency fees with private plaintiff law firms and expert witnesses in litigation involving the U.S. government. This is momentous for Sherwin-Williams (SHW), and NL Industries (NL).

From Law and More:

“This is a profound statement of policy that should influence state and local government to look at contingency fee proposals with a skeptical and critical eye. Given recent experiences and developments in California and Rhode Island, other public authorities should expect strict scrutiny of such arrangements from ethical, legal, financial and political perspectives.

“The magnifying glass is focusing on this issue – and the public will demand transparency and accountability. No one wants an encore of the tobacco litigation disaster which enriched the states and contingent-fee lawyers dramatically but provided minimal, if any, health benefits.”

“This Executive Order sets a proper framework for fairness and is consistent with the way the U.S. government should contract for services generally for appropriate transparency and accountability. While it may have precious little impact on the disposition of state leaders inclined to enjoy what they perceive as a Free Lunch, especially Democrats, it draws the right line in the sand for those officials of either party in the states who are concerned about abuse of the system they are supposed to uphold with integrity.

“A prime example is the just retired long-time esteemed Democratic Maryland Attorney General who had taken understandable umbrage at the temerity of noted trial attorney Peter Angelos who claimed that the had ‘contracted with the state’ to receive 25 percent of the $4 billion the Free State took as its share of the global tobacco settlement, or a cool billion dollar sure thing for what was over $200 million for his ‘effort.’ So – over time – principle shall triumph, as Americans loath those who rig the public system for gross financial gain without earning it.”

The U.S. Chamber of Commerce has issued a press release on this development.

Fully expect this to now follow to the state level….

This is great news for Sherwin-Williams and NL Industries as it is the beginning of the end for this litigation.

Read the Execuative Order here.

Corn prices have fallen 25% since their early March highs and the weather the past two weeks has lead to a surge in planting with up to 40% increases in some areas. The beneficiary? Ethanol producers. Versun (VSE), who recently experienced a 31% increase in revenue, reported a quarterly loss and said the culprit was increased corn prices that had them paying $4.05 a bushel in Q1 and a inexplicable $33 million “loss” contributed to hedging. How do you lose money hedging against higher corn prices when corn prices go higher??

When you consider Aventine (AVR) reported a profit and said they paid $3.58 a bushel in Q1, Verasun’s results seem to be an indication of poor management rather than rapidly deteriorating fundamentals in ethanol. Considering estimates have ethanol being profitable to produce at corn prices up to over $4.80 a bushel, ethanol will remain profitable for the foreseeable future. Archer Daniel’s Midland (ADM) reported Q1 results recently and while they do not release their price paid for corn (I presume this is due to it being dramatically lower than their rivals and would put pressure on suppliers to provide these prices to others), they reported an increase in Q1 corn processing results. Shares of Pacific Ethanol (PEIX) are traded up 12% after their earnings actually came in it a profit

Now that we have a record corn crop going into the ground at a rapidly increasing rate, corn prices look to plummet before the summer is finished. When you add the fact that new ethanol production capacity that was scheduled to come online has slowed due to the higher corn prices, anticipated demand will not materialize. For ethanol producers who managed their businesses well during the price spike, this will mean a series of earnings estimate beating results will come rushing in. Ethanol producers are in a unique position to be able to hedge their input prices against spikes. The rise in corn prices seems to have taken no one other than Verasun by surprise and producers actually benefited from it. Now that prices are falling and gas prices are going in the opposite direction, more good news is in store for investors.

With the current outlook poor for the sector, shares ought to spike on the unexpected good news.

World’s biggest retailer Wal-Mart (WMT) said Tuesday quarterly profits rose 8% to $2.83 billion ($0.68/share) and revenue rose 8.5% to $86.41 billion — hitting analyst estimates exactly. Wal-Mart said Sam’s Club and international operations were its strongest areas, while food and generic drug sales were large growth sections. It expects domestic comparable-store sales to rise 1-2% in the coming quarter after a 0.6% first-quarter rise. It forecasts Q2 earnings from continuing operations of $0.75-0.95; analysts had been calling for $0.79. In the company’s earnings press release, CEO Lee Scott shrewdly observed: “While these are record sales and earnings, we feel there was an opportunity to have done better,”

Thanks for the heads up Lee. Kind of like General Custard saying “we should have brought more guys”

It is time for Lee to go. It is not for the standard reason people give, the stagnant share price. Let’s be honest here. If you were dumb enough at the turn of the century to pay 60 times earnings for a massive retailer growing at less than 1/2 that, you deserve the predicament you are now in. Given Wal-Mart’s scale, it would have been impossible for ANY CEO to get performance out of the company to justify that high of a PE ratio and avoid the eventual share decline. The price of the stock had to fall.

Why should Scott go? I have been in 4 Wal-Mart the past 2 weeks and one thing sticks out. They have not changed at all the past 7 years. Everything feels the same, the look , the merchandise, the people, everything. The worst part is, there seems to be no plans to change anything. If you are struggling with earnings and growth because you have become stale, do something different. You just can’t sit there, no matter who you are. How about this? Let’s update the clothing. We have heard for years that Target has had great success with low cost brand name designer clothing. Wal-Mart’s is just low cost and in an increasingly brand conscious world, it just is not cutting it. Let spruce it up a bit. Maybe we could take some of the $7 plus billion you are sitting on and buyback a meaningful amount of shares? Wal-Mart is increasing cash at an over a billion dollar a year pace and last year spent just over that on share buybacks. Let’s take $3 billion and make a dent in the shares outstanding ( 1.5%) and give more back to shareholders if we are not going to put it work anywhere else.

Here is another issue. When I go into as Target, I can easily fins my way around because the layouts of the stores are very similar. It makes may shopping experience less frustrating. Are there any two Wal-Marts that are laid out the same? It makes it very difficult to “just run in” to a Wal-Mart to pick something up. Given the choice, I will choose a Target for thje convenience.

Wal-Mart’s image has taken a hit. When people want something “cheap” they think Wal-Mart, when the want a value, they think “Target”. Because Scott seems to have no desire to change that, it is time to go….

I hold no position in any company listed above.