Yesterday, Bunge (NYSE: BG) was wrung out like a sponge.
This wasn't the consequence one might generally expect for a company reporting an 82% quarterly sales surge, nor for one basking in the glow of fertilizer fever, along with market darlings Potash (NYSE: POT), Mosaic (NYSE: MOS), and Terra Industries (NYSE: TRA).
Looking solely at revenue, the latter characterization sounds like a stretch, since most of Bunge's sales derive from agricultural processing, a la Archer Daniels Midland (NYSE: ADM). But look at segment operating profit, and you'll see fertilizer chipping in 30% for the quarter and 44% for the full year. Fertilizer clearly gives this farmhand a hand.
Bunge thoroughly thrashed the average analyst's assumptions, so that pat explanation won't fly here. Operating leverage -- the increase in operating profit relative to the increase in sales -- looks a bit limp relative to the full year, though.
The straight comparison is unfair, because one-time reorganization and impairment charges mask the quarter's true profitability. If we add back the fourth quarter's $67 million in charges to segment operating profit, some positive leverage reappears. The effect was much stronger over the course of 2007, however. Something else is going on here.
Digging into the individual segments reveals fertilizer as an unlikely culprit, but there it is: a 39% boost in sales coupled with a 17% lift in profit. Management explained this shortfall by pointing to a new Brazilian value-added tax provision, for which the company reserved an extra $50 million, representing roughly one-third of the fertilizer segment's gross margin. If the company is unable to recover these taxes, that VAT could take a serious bite out of future results.
Further fertilizer Foolishness:
