I am looking to create a comments page of readers thoughts and experiences with the blog. While I have received many of them from you up until this point, I do not feel right about publishing them unless you submit them knowing they may be. So, if you have already sent one, please re-submit it so I know it has been submitted under the assumption it may be published. That being said, please email me at valueplays@gmail.com and give me your thoughts.

Please Include (some ideas):

• Your name
• A website or blog title if you have one (I will provide a link to it)
• Your position if applicable, for example: fund manager, analyst etc..
• A favorite post, pick or other notable item
• Why you read ValuePlays
• What makes ValuePlays different

Should there be a reason that you may not want you name published, please let me know and I will oblige. I will need to verify the authenticity of your email but will honor any special requests.

Thank you

Todd

Other than electricity, what are some additional uses of coal?

• Coal liquefaction offers promise for nations that are rich in coal, yet scarce in oil. There are four plants in the United States and South Africa currently using coal as feedstock to create liquid fuels. A plant using more than 6 million tons of coal annually could produce more than 3.6 million barrels of diesel and Naptha annually, making diesel liquefaction competitive at $35 to $40 per barrel oil prices. China has earmarked $15 billion for coal-to-diesel-fuel conversion plants and has targeted replacing 10 percent of its oil imports with coal-liquified oil by 2013.
• Partial oxidation – gasification – combines feedstock, oxygen and steam to produce a synthesis gas that is cleaned of impurities. Syngas can be used as a fuel to generate electricity and steam or as a chemical building block for the petrochemical and refining industries. The gasification process converts feedstock such as coal, crude oil, petroleum-based materials or gases into marketable fuels and products.
• Syngas from gasification historically has been used as a feedstock for the production of chemicals, accounting for nearly one-half of syngas use worldwide in the late 1980s. World gasification capacity grew by 50 percent during the 1990s, with more than 40 plants coming on line.
• Today, there are approximately 155 commercial gasification plants in development, construction or operation around the world in 28 countries in North and South America, Europe, Asia, Africa and Australia. When operational, these facilities will provide the energy equivalent of more than 770,000 barrels of oil per day.

How to invest and make money on coal?

Just as investing in alternative fuels begins and end with Archer -Daniels Midland (ADM), commercial roofing and insulation with Owens Corning (OC) and paint and coatings with Sherwin Williams (SHW), investing in coal begins and ends with Peabody Energy (BTU) . Since their initial public offering on May 22, 2001, at $28 per share, or $7 per share on a split-adjusted basis following the March 2005 and February 2006 two-for-one stock split, shares hit a high of $75 in May of 2006. Since then, shares have fallen steadily (40%) to their current level of $45 despite growing earnings last year 60% . The world’s largest public coal company, their products fuel approximately 10 percent of America’s and 3 percent of the world’s electricity.

So, how much coal does Peabody have? If you converted their coal into each one of the following energy sources, Peabody’s reserves would provide :

• Enough electricity to provide all the US electricity demands for 5 years
• More that 10 times the total US natural gas uses
• Diesel fuel: enough to fuel the US truck fleet for 42 years
• Hydrogen: enough to replace all oil in US transportation for 6+ years

BTU has not traded in a PE range this low since early 2003 when it’s stock traded for a split adjusted $9 a share. Since that period they have grown earnings from 25 cents a share to $1.92 last year (680%) and dividends have grown from 11 to 24 cents a share (118%). Since 2001, shipments of coal have grown from 194 million tons to 240 million tons in 2006 and in 2006, their worldwide coal sales were 38% greater than their closest competitor and in the US, Peabody’s shipments were 22% of all US coal shipments and 80% greater than the closest competitor. They clearly dominate the coal market both nationally and internationally.

The Future:

So, now that we know where we are, we need to figure out where coal and BTU is going. Let’s take a look at both worldwide demand and demand here at home in the US. The EIA estimates that 115 gigawatts of coal fueled electricity will come on line worldwide in the next 3 years and by 2030, an additional 156 gigawatts will come online in the US. These uses by themselves will require an additional 500 million tons of coal annually. This does not include additional coal demand for the other uses previously mentioned.

Currently BTU has a 1 billion ton backlog of orders with contract ranging from 1 to 19 years with the average being 5 years. All long term contract have “price re-opener” provisions in them which protects BTU from a profit squeeze should input costs rise unexpectedly.

BTU is currently is in the process of building 3,100 megawatts of electrical generation capabilities in two locations at BTU owned mining sites. This will enable BTU to become a “minimal cost” electrical producer at these locations as they would be using their own coal to produce the electricity they would then resell.

Debt grew by $1.7 billion in 2006 as this money was used to purchase Excel Coal in Australia and repay its debt. The acquisition makes BTU that largest coal producer in that country also and provides BTU a lower cost basis to export coal to Asia and China whose demand for it is surging. The Australian mines primarily produce “metallurgical coal” . This high BTU coal is primarily used for the production of steel and is highly sought after by China. Selling for about $100 a ton (vs approx. $26 a ton for all other coal), BTU estimates it will sell an additional 3 to 6 million tons of this in 2007 vs 2006 providing about $500 million in additional revenue with no added cost.

For 2007 BTU is predicting 265 to 285 million tons of coal shipments for a 10.4% to 18.7% increase over 2006.

Pricing.
From 1990 to 1999 the price of coal declined from $1.38 per million BTU’s to $ .91 per million BTU’s. Since 1999, that trend has reversed and prices have risen to $1.15 in 2005 and the EIA estimates this price will continue to rise to $1.84 by 2030.

Geopolitical Considerations
The news this week made reference to, but did a lousy job of covering the “summit” of natural gas producers. These nations are attempting to band together and create an OPEC like cartel for the sale of natural gas. The US is not one of these nations and the formation of an organization like this would only be done for one reason, to raise the price of natural gas. This event, should it come to fruition, would be monumental to the coal industry. It would create a huge demand for reliable, low cost fuel for the production of electricity and more plants and other industries would move from natural gas to coal as their main fuel source. I anticipate these nations will form this alliance and Peabody and its shareholders will be the main unintended beneficiary of it.

So, all this now has us considering buying shares of a company that is the world leader in its industry, with increasing demand and pricing power for its products selling at historically low levels….

ValuePlay anyone?

I was recently contacted by LexisNexis^® Mealey’s Litigation Report: Lead regarding my work on the Sherwin-Williams (SHW) litigation. The following is what appeared: The full report can be purchased here

Massachusetts Investor: Shareholder Lawsuit Needed Against Plaintiff Attorneys

BOSTON – Shareholders who own stock in the companies being sued under public nuisance law for producing lead paint and pigment should sue the plaintiff attorneys pursuing such litigation, a Massachusetts investor told Mealey Publications on March 29.

Todd Sullivan, a self-described value investor, said he is exploring the possibility of suing the plaintiff attorneys Motley Rice and the Rhode Island Attorney General’s Office in connection with the case brought on behalf of the State of Rhode Island (State of Rhode Island v. LIA, No. 99-5226, R.I. Super., Providence Co.).

Litigation ‘Wrong’

Sullivan said that the litigation against Sherwin-Williams and others is “wrong” and that the former makers of paint and pigment should be paid restitution for their defense costs.

The money being spent on litigation should be spent on growing the companies, Sullivan said.

Sullivan said that based on conversations with attorneys, he is confident that the Rhode Island lawsuit will move to the federal level as defense counsel file a case on constitutional grounds.

Shareholder Action

Once in federal court, Sullivan said, he is “sure it will be overturned.”

Should that happen, Sullivan said he would file a case on behalf of shareholders, alleging that the plaintiff attorneys’ actions devalued the defendants’ stock and that the companies should be compensated.

Furthermore, Sullivan said the combination of federal action and a shareholder lawsuit will have a chilling effect on other jurisdictions, such as Ohio.

Otherwise, Sullivan said, “we are looking at the next wave of corporate bankruptcies.”

• Lynch received his bachelor’s degree from Brown University in 1987 and his law degree from Suffolk University. While at Brown, he led the basketball team to its only Ivy League championship in1986, winning all-Ivy League honors in his senior year. It really makes his proclamation to the press at briefing regarding DuPont settlement, “What makes this announcement so gratifying is that this money will go straight to cleaning up the mess” even more revolting… doesn’t it? Way to help Rhode Island’s children Pat.

• Please email me. I do not always get a chance to review the comments on a post and if you are commenting on something that was posted days ago, with activity on the site surging, I may not get to it. Enhanced Features Subscribers always get top priority but I will try to get to all of you. As the numbers of site visitors grow each day the delay here may be longer. Do yourself a favor, just buy the subscription for $6.99 a month and guarantee a fast reply. Think of it this way, if you had bought just 10 shares of each stock I recommended when I recommended it, you would have paid for 41 months of the subscription already. It’s a no brainer.

• Click this link. Then place your mouse on the spreadsheet and scroll it to view securities and results in the portfolio as well as the stocks on the “avoid” list. The portfolio should automatically update every 5 minutes and prices are on a 20 min. delay.

• I received an email on this from a reader and seem to have lost the email. He wanted to know of this was a buy. Reader, I see no reason to buy this. It’s financial performance has been dead flat for 5 years now. This is especially disappointing since railroads have experienced a renaissance the last two years and they seem to have missed out on it. If you want a railroad, go with CSX. They are the main transported of goods from the Midwest to the east. Basically, if the east coast needs ethanol, CSX brings it to them. I have owned it for a year and a half now and done very well with it but do not think it presents a “value” at these prices. However, if you really want a railroad, go for it.
• Sorry for the delay

• I was recently interviewed by them regarding the Sherwin-Williams (SHW) litigation and the text of the interview will appear in tomorrow’s post.

• In People ex rel. Clancy v. Superior Court (1985) 39 Cal.3d 740 (“Clancy”), the California Supreme Court “evaluate[d] the propriety of a contingent fee arrangement between a city government and a private attorney whom it hired to bring abatement actions under the city’s nuisance ordinance.” (Clancy, 39 Cal.3d at 743.) The California Supreme Court explained that “the contingent fee arrangement between the City and Clancy is antithetical to the standard of neutrality that an attorney representing the government must meet when prosecuting a public nuisance abatement action. In the interests of justice, therefore, we must order Clancy disqualified from representing the City in the pending abatement action.”
• Clancy is applicable to the instant case. Plaintiffs fail to persuasively distinguish Clancy, or otherwise persuasively articulate why their fee arrangements with outside counsel are proper. Plaintiffs’ main argument is that the government attorneys continue to retain and/or exercise decision-making authority and control over the litigation in this case.1 The fact remains, however, that outside counsel (i.e., Thornton & Naumes, Motley Rice LLC, and Mary Alexander and Associates for the City and County of San Francisco, and Cotchett, Pitre & McCarthy for most of the other public entities) are co-counsel in this case. They are performing work as attorneys for the plaintiff government entities, and consequently they are subject to the standard of neutrality articulated in Clancy. Oversight by the government attorneys does not eliminate the need for or requirement that outside counsel adhere to the standard of neutrality.
• Moreover, as a practical matter, it would be difficult to determine (a) how much control the government attorneys must exercise in order for a contingent fee arrangement with outside counsel be permissible, (b) what types of decisions the government attorneys must retain control over, e.g., settlement or major strategy decisions, or also day-to-day decisions involving discovery and so forth, and (c) whether the government attorneys have been exercising such control throughout the litigation or whether they have passively or blindly accepted recommendations, decisions, or actions by outside counsel. Plaintiffs in their opposition characterize outside counsel as “collaborators.” (See Pls.’ Mem. Opp. Motion, at 8:21-22.) Given the inherent difficulties of determining whether or to what extent the prosecution of this nuisance action might or will be influenced by the presence of outside counsel operating under a contingent fee arrangement, outside counsel must be precluded from operating under a contingent fee agreement, regardless of the government attorneys’ and outside attorneys’ well-meaning intentions to have all decisions in this litigation made by the government attorneys.
• Accordingly, Defendants’ motion for an order precluding Plaintiffs from retaining outside counsel under any agreement in which the payment of fees and costs is contingent on the outcome of the litigation is GRANTED.

• “We strongly request that Attorney General Marc Dann not proceed with his lawsuit against paint manufacturers in Ohio. This lawsuit would send the wrong message about our desire to bring business and jobs to our state.
• “We have made significant progress in attracting new investments and jobs to Ohio with our recently-passed legal and tax reforms – as evidenced by Ohio’s number one ranking in Site Selection for investment in 2006. We need to build on this progress, not take a step backward with lawsuits against Ohio employers.”

The acquisition of Nitco Paints is just the beginning of Sherwin-Williams’ journey in India, Christopher Connor, chairman and CEO of Sherwin-Williams, told DNA Money on Wednesday. “There is more to come soon,” he said on the sidelines of an event to announce the acquisition of Nitco Paints.

Sources further said that Sherwin-Williams has drawn up a huge spread for India, involving exclusive retail outlets across the country and entering into exclusive tie-ups with leading real estate developers and builders for exterior paints Sanjiv Batra, CEO, Sherwin-Williams India, though, said, “I can’t disclose any future acquisition plans or fund allocations at this moment, but the company will grow at a rapid speed in the next few quarters.”

“Save your frightened song for when there is really something wrong! Don’t cry ‘wolf’ when there is NO wolf!” The Boy Who Cried Wolf , Aesop’s Fables

In case you missed it today and I think you would have had to have had no contact with the outside world in order to, researchers once again predicted an above normal hurricane season. Excuse me while I yawn at this one. In order to fully understand the true depth of my ambivalence, one must take a walk down memory lane and look at past hurricane forecasts. I am only going to go back the last 5 seasons here just to make a point:

• April 3, 2007: The 2007 Atlantic U.S. hurricane season will be “much more active” than average, with nine hurricanes – five of them reaching Category 3, 4 or 5 – and 17 named storms, according to a forecast Tuesday from Colorado State University researchers.The researchers lifted their forecast from early December because of the “rapid dissipation” of El Niño over the past few months. “Tropical and North Atlantic sea surface temperatures remain well above their long-period averages,” a trend commonly associated with an active Atlantic basin hurricane season and lower-than-normal sea level pressures, wrote researchers Philip Klotzbach and William Gray. “We expect the 2007 hurricane season to be very active.”
• May 22, 2006 — NOAA today announced to America and its neighbors throughout the north Atlantic region that a very active hurricane season is looming, and encouraged individuals to make preparations to better protect their lives and livelihoods. “For the 2006 north Atlantic hurricane season, NOAA is predicting 13 to 16 named storms, with eight to 10 becoming hurricanes, of which four to six could become ‘major’ hurricanes of Category 3 strength or higher,”
• May 16, 2005 — NOAA hurricane forecasters are predicting another above-normal hurricane season on the heels of last year’s destructive and historic hurricane season. “NOAA’s prediction for the 2005 Atlantic hurricane season is for 12 to15 tropical storms, with seven to nine becoming hurricanes, of which three to five could become major hurricanes,”
• NOAA’s 2004 Atlantic hurricane season outlook indicates a 50% probability of an above-normal hurricane season, a 40% probability of a near-normal season, and a 10% chance of a below-normal season, according to a consensus of scientists at the National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center (CPC), the Hurricane Research Division (HRD), and the National Hurricane Center (NHC). See NOAA’s definitions of above-, near-, and below-normal seasons. The outlook calls for 12-15 tropical storms, with 6-8 becoming hurricanes, and 2-4 of these becoming major hurricanes. These numbers reflect a predicted ACE index in the range of 100%-160% of the median, and indicate a likely continuation of above-normal activity that began in 1995.
• NOAA’s 2003 Atlantic hurricane season outlook indicates a 55% probability of an above-normal Atlantic hurricane season in 2003, a 35% probability of a near-normal season, and only a 10% chance of a below-normal season, according to a consensus of scientists at the National Oceanic and Atmospheric Administration’s (NOAA) Climate Prediction Center (CPC), the Hurricane Research Division (HRD), and the National Hurricane Center (NHC). See NOAA’s definitions of above-, near-, and below-normal seasons. The 2003 outlook calls for 11-15 tropical storms, with 6-9 becoming hurricanes, and 2-4 becoming major hurricanes.

The real question here the talking heads on TV ought to be asking is: “when haven’t they predicted an active season”? The answer? I do not know because the NOAA archives only go back to 1999 and only 2001 predicted a benign forecast of “normal to slightly above normal” hurricane activity. Every other year has featured an apocalyptic forecast. What do we as investors do then? This answer is easy, nothing. Meteorologists cannot even tell me with any significant accuracy if it is going to rain or not this weekend yet we are supposed to believe they can now predict a certain number of storms are going to form off the coast of Africa over 3,000 miles away and hit the states during the next 6 months? No way…..It is a fools bet. One also has to notice as they read the forecasts: “Why are they all basically the same?” 12-15 storms, 6-8 hurricanes, 2-4 majors. If every forecast is for the same number of storms, isn’t that then, “normal”?

But, what if they are right you ask? Well, if they are, there is nothing you can do about it so getting all worked up and trying to adjust your holdings now to reflect that is a lesson in futility. If you own stock in construction related companies (OC ), (SHW ), (HD ), (LOW ), you will benefit as repairs will boost sales. If you own USO and a storm hits the gulf, the increase in oil prices will benefit you. If oil goes up, ethanol companies like ADM benefit. If you own stocks in entertainment companies, you will suffer as this discretionary income will go toward other uses.

The really ugly truth is that hurricanes, unless they are Cat. 4 or 5 and cause massive damage to a major city and port like Katrina did, are not bad for the economy and actually provide a stimulus. After the brief interruption during and immediately after the storm, the rebuilding increases economic activity. When you have a slowing housing market and laborers out of work, nothing will put them back to work faster than a CAT-3 hurricane that damages 100,000 homes. No, I am not rooting for hurricanes and no, I am not hoping to profit from them, (though the ValuePlays Portfolio will) I just need to interject a little reality here to help you wade through the barrage of inane hysteria you are being assaulted with today.

What happens in the aftermath of a hurricane? Homes and businesses are damaged and /or destroyed and cleanup and repair then begins. Immediately federal and state funds flow into the area to clean up the mess providing additional jobs and money. Then, insurance proceeds come pouring in to add even more stimulus and jobs as residents try to rebuild thousands of homes and businesses at once . Of course there are areas of suffering and that cannot be avoided, but in the aggregate, there is a significant economic stimulus to the area for years to come.

The bottom line is that it has become painfully apparent we are always going to get a forecast that is for “above normal” hurricane activity. Worrying about it or trying to adjust your portfolio for this presumed alleged event in April is a colossal waste of time.

The phrase “to cry wolf“, derived from the fable, refers to the act of persistently raising the alarm about a non-existent threat, with the implication that the person who cried wolf would not be taken seriously should a real emergency take place. It can also be used to describe an alarm system that regularly goes off falsely, causing it not to be believed when a real emergency occurs.

Forecasters beware…

Here are the most read stories for the month of March:

1. The ValuePlays Portfolio
2. Sherwin Williams- No Lead Threat
3. Ethanol: Debunking A Few Myths
4. Taking “A Leap”
5. Housing: Enough Already!

Site traffic surged again this past month as subscribers rose 50% and daily traffic jumped 78% for the month (140% the past 2 weeks). Keep forwarding the daily email to family and friends and encourage them to sign up themselves, the more of us there are the better for all of us.

• I have added an email link on the main page. Feel free to email me thoughts and ideas for stocks or general investing. I do not always get a chance to review the comments on a post and if you are commenting on something that was posted days ago, chances are I may not get to it. Enhanced Features Subscribers always get top priority but I will try to get to all of you. As the numbers of site visitors grow each day the delay here may become longer. Do yourself a favor, just buy the subscription for $6.99 a month and guarantee a fast reply. Think of it this way, if you had bought just 10 shares of each stock I recommended when I recommended it, you would have paid for 41 months of the subscription already. It really is a no brainer.
• Criticism and /or complaints are welcome also just, keep them constructive. I can promise insulting or otherwise inappropriate emails to me or other “commenters” will be deleted immediately and the email address blocked. If you are so inclined to send one, make it a good one because it will be the last.
• I am always looking for way to better the site and frequent visitors at times have noticed some odd things as I learn programing code “on the fly” as they say. Feel free to email any ideas to me. I cannot promise I will act on them but they will be considered. Any legitimate suggestion to better your experience on the site will get serious consideration.
• Stock or investing ideas are welcome and may be used in a future post. For your privacy, your email address will not (unless you want it to be).

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Since the US crop report is coming out in 15 minutes this morning at 8:30 am, I though I should comment on it since I have been both an advocate and investor in renewable fuel for quite some time through Archer Daniels Midland (ADM). First things first, the crop report. Estimates for corn are an increase of 10 million acres for a total of 88 million acres being planted. My estimate is a minimum of 90 million acres. People for far too long have underestimated both the US farmer and the ethanol industries desire and ability to make ethanol a staple fuel source. Things begin to really change this summer. $4 a gallon gas will be reached and this will be the summer consumers finally have had enough and start to rise up in chorus to demand more ethanol at their pumps.

Currently ethanol is blended in 3% of gas in the US. We could up that number to 10% and need no modifications to any vehicle on the road. Million of people are driving E85 capable vehicles and are not even aware of it. My 2005 Suburban bought in Massachusetts for example, can run on E85 and I would be using it were it available. I would, and ever study done to date has confirmed that people would be willing to pay more for a home grown fuel than for gas from oil from the middle east.

The renewable fuels standard President bush signed in 2005 called for refiners to use 4.7 billions gallon of ethanol by the end of 2007 and it increases gradually to 7.4 billion gallon by 2012. Many ethanol critics use this as proof that were it not for the mandate, ethanol would not be used. To illustrate why this is false one must consider that in 2006, 4.8 billion gallons were produced for a demand of 5.3 billion gallons. Were the mandate the only reason for ethanol demand, these numbers would not exist. By the end of 2008 a minimum of 8 billion gallons will be available and no slackening in demand is seen. Why? Ethanol extends gas supplies and keeps the cost of gas down. Demand for E85 in the Midwest cannot be met. In short, famrers and the ethanol industry have made the “required standard” irrelevant.

Has there ever been a product that the majority of Americans wanted that business did not find a way to produce affordably and in quantites to satisfy them? I can’t think of any either….Do not ever bet against American ingenuity

Here are some more ethanol tidbits:

FACT: In 2005, the ethanol industry supported the creation of more than 153,725 jobs in all sectors of the U.S. economy, boosting U.S. household income by $5.7 billion.

Ethanol industry operations and spending for new construction added $1.9 billion of tax revenue for the Federal government and $1.6 billion for state and local governments. And the combination of spending for annual plant operations and capital spending for new plants under construction added more than $32.2 billion to gross output in the U.S. economy.

Source: Contribution of the U.S. Ethanol Industry to the Economy of the U.S. in 2005

FACT: By increasing the demand for corn, and thus raising corn prices, ethanol helps to lower federal farm program costs.

In 2004, USDA estimates ethanol production reduced farm program costs by $3.2 billion.

FACT: Ethanol refineries serve as local economic power houses. Click here for information on how a 50 and 100 million gallon ethanol refinery can benefit your community.

FACT: If ethanol were removed from the market, a shortfall would have to be made up from expensive imports.

Gasoline prices would increase 14.6% in the short term (36.5 cpg if gas is $2.50/gal). Prices would increase 3.7% in the long term (9.25 cpg if gas is $2.50/gal) even after refiners built new capacity or secured additional sources of supply.

Source: LECG, LLC, May 2004

FACT: The federal ethanol program generates revenue for the U.S. Treasury.

The federal ethanol incentive, which is available to gasoline marketers and oil companies (not ethanol producers) as an incentive to blend their gasoline with clean, domestic, renewable ethanol, is a cost-effective program. It actually returns more revenue to the U.S. Treasury than it costs, due to increased wages and taxes and reduced unemployment benefits and farm program payments, while at the same time holding down the price of gasoline and helping the American farmer.

The federal ethanol program was established following the OPEC oil embargoes of the 1970s, which exposed our dangerous dependence on imported oil. As an alternative to petroleum, ethanol directly displaces imported oil and reduces tailpipe emissions while helping to bolster the domestic economy. Yet today we import more petroleum than ever before. With rising crude oil prices and increasing international instability, incentives for production and use of domestic ethanol are critical.

We have subsidized the oil industry substantially since the early 1900s, and continue to do so. In fact, according to the General Accounting Office in an October 2000 report, the oil industry has received over $130 billion in tax incentives just in the past 30 years – dwarfing the roughly $11 billion provided for renewable fuels. During this time, U.S. oil production has fallen while annual U.S. ethanol production has grown dramatically.(GAO/RCED-00-301R)