November 24, 2004
Another Positive Development for the Wish List

Earlier this month Caldwell declared a dividend and offered its most optimistic outlook in years.  Earlier this week Hershey announced that it intends to takeover Mauna Loa. The takeover of Mauna Loa - the company that buys all of ML Macadamia Orchard’s macadamia nut (mac nut) production - is potentially good news for NUT.

Eventful Year For NUT

Leading into 2004 NUT was a attractive investment because the U.S. dollar was weakening (against the Australian dollar), and the partnership’s share price did not reflect the increase observed in mac nut spot prices. However, undervaluation quickly vanished after NUT reported its fourth quarter results and raised its quarterly distribution from 3 to 5 cents. In fact, as NUT approached $4.80 overvaluation threatened to come into play. 


Since the early 2004 rally NUT shares have traded lower, with units being offered below $4.00 as recently as November 22. This share price decline was in response to not one, but many factors, including NUT’s unimpressive quarterly financial results, smaller mac nut price increases, unexpected lawsuit expenses, and poor crop production. With these events in mind, NUT’s share price appeared likely to stagnate going forward, at least until fourth quarter results were released. But then along came Hershey:

“We're excited about the opportunity to unlock Mauna Loa's immense growth potential as we leverage Hershey's expertise in product innovation, nut processing, logistics and selling.”
Hershey

Hershey Food Corporation (HSY) is multibillion dollar company that – at least when compared to the marketing/distribution clout of Mauna Loa – has the ability to turn water into wine (or in this case mac nut ingredients into ‘iconic brands’). A growing Mauna Loa means strong(er) demand for NUT’s nuts. 

In sum, as an eventful 2004 nears its end two important questions linger: 1) Can NUT get back on track with a strong fourth quarter harvest?  2) Will mac nut prices received from Mauna Loa  – which will not be known until early 2005 – continue to rise?

One final, nutty question is also worth asking leading into 2005: Do any of the near term fundamentals matter given that Hershey will soon take the reigns from Mauna Loa?

Conclusions and Investment Opinion

NUT estimates that prices received for its nuts have increased slowly in 2004 - from 49 cents/pound ended March 2004 to 50.02 cents ended September. Although the latest nut price estimate is above the critical 50 cent mark*, a more significant increase over last years 48.57 cents is likely required before NUT considers another distribution increase.

NUT’s mac nut production is down by 31% in 2004 compared to 2003.  This production shortfall, when combined with more moderate increases in mac nut prices, puts a great deal of focus on NUT’s fourth quarter results.  Historically NUT’s fourth quarter decides whether or not the company has had a successful year.

“The decrease (in 2004 nut production) was primarily attributable to poor climatic conditions during the nut development period, delaying the timing of nuts dropping from trees.” 
3Q04 – 10Q


NUT remains on the Wish List.  We are looking for positive results for the quarter ended December. We believe the Hershey takeover will be beneficial to the entire mac nut industry over the long-term.


Links:
Hershey Takeover Announcement
USDA (July 2004)
*  “we believe that NUT remains on fragile footing until, and if, prices received per pound reach the 50+ cent area.”  Feb 19, 2004


BWillett@fallstreet.com


TAlway@fallstreet.com