February 19, 2004
NUT: Don’t Go Nuts Yet
According to the USDA’s preliminary summary on Noncitrus Fruits and Nuts (L), macadamia nut prices increased by 2 cents in 2003 to 59 cents per pound. The USDA attributes this price increase to a 4% decline in production and an unchanged macadamia nut crop value. In other words, since a smaller macadamia crop was worth roughly the same price as a larger 2002 crop, Macadamia nut prices rose slightly for the first time since 1999 in 2003.
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While 2003 proved to be an encouraging year for NUT owners – both because of the increase in nut prices and the rally in the Australian dollar versus the greenback (which makes Australian nut imports into the US less competitive) – it is nonetheless important to remember the calculation NUT uses to determine the price they receive for their nuts. To be sure, by using a 2-year USDA trailing average for part of the calculation, the increase in macadamia prices in 2003 will not immediately show up in NUT’s prices received (the price per pound for macadamias in 2001 was also 59 cents). Moreover, there is no way of knowing how Mauna Loa is performing until the company produces its financial results to NUT. NUT’s nut price received is ‘determined by a formula which is weighted 50% on the two-year trailing average of USDA reported prices and 50% on the current year processing and marketing results of Mauna Loa’.
Suffice it to say, we believe that NUT remains on fragile footing until, and if, prices received per pound reach the 50+ cent area. Quite frankly, even though the partnership continues to diversify revenue flows by expanding its contract farming business, it is nonetheless difficult when analyzing historical financial documents to conclude that strength in NUT’s financial results will emerge with nut prices below 50 cents/pound (NUT’s average nut price received in 3Q03 was 47.04 cents per pound).
Given the recent run-up in NUT’s share price investors appear to be able to ignore the partnerships financial challenges and focus on the future. The future, which is admittedly imprecise given the impact weather and currency fluctuations can have on nut prices, could be one in which Macadamia nut prices continue to firm, one in which contracts with Mauna Loa are renegotiated or not renewed, and/or perhaps also a takeover/leadership change. We believe that NUT is an attractive investment for the long-term because of these reasons, but we have reservations about purchasing the company at current prices.
For the 3-months ended December 29, 2003 NUT’s average daily volume was 7,600 shares. For the 32-days ended February 13, 2004 NUT’s average daily volume was 14,500. Beyond Mr. Edrahimi’s continued accumulation of shares (made around the $3.50 per share area) there is no tangible reason to justify this increase in investor interest. Rather, the hope appears to be that Mauna Loa’s financial performance will be positively, and immediately impacted because of favorable US dollar/Aussie dollar trends. Although this could well be the case – Mauna Loa should reap the rewards of a declining US dollar well before the USDA price for macadamias shows a notable increase – it remains a speculation until Mauna Loa releases their financials to NUT (expected in late February/early March each year).
In short, we believe that NUT is an attractive company to accumulate on weakness for the long-term. However, we would be reluctant to purchase shares above $4.00 a share at this time. We do not believe the investor should be surprised by poor financial results in the near term.
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