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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


July 15th 2011 Molycorp
NYSE Symbol: MCP
Industry: Rare Earth Metals
Price as of 7/15: $52.26

The volatility is back in the markets ahead of a flood of second earnings next week. This week the averages are all over the place trying to position themselves ahead of those earnings. The dividend ideas continue to hold up well as investors seek income shying away from growth names not tied to the commodity space. This week we'll take a right turn featuring a speculative growth stock in the rare earth commodity space. The stock of the week is Molycorp. The rare earth commodity industry was not an issue the last several decades as demand was limited and supply was plentiful thanks to China. However, a renewed emphasis on green energy plays like wind turbines, smart phones, and electric battery hybrid cars has stimulated demand so much so that China has dramatically limited exports, putting the rest of the world in a bind, including the U.S. Rare earth commodities have also become a National Security issue since military equipment like guided missiles now use them boosting the significance of Molycorp as the only U.S. based firm. The recent pullback in the stock has provided a more attractive entry point, particularly since sales and earnings are set to explode in the next several years. Sales are expected to grow over 60% while earnings will more than double, yet the stock only trades for 13 times earnings. Obviously, Wall Street is skeptical that pricing will remain high. Even the most bullish analysts expect pricing to come down. Just this week, the World Trade Organization forced to China to increase exports, but only to the point of matching last years' exports which is still well below global demand. Molycorp is certainly not a conservative play, but more of a speculative stock with plenty of opportunity for growth if the bull case plays out.

Back in May, Molycorp posted a net loss of $909,000, or 3 cents a share, compared with a year-earlier loss of $7.7 million. Excluding items, earnings came in at $2 million or a penny a share. Analysts, however, were expecting 10 cents a share. Revenue for the quarter rose more than seven-fold to $26.3 million, boosted by a 65 percent increase in sales volume and soaring pricing rare earth oxides. Management is very bullish about the rest of the year indicating the first quarter is always a slowest quarter for them. The company had cash flow of $5.2 million for the quarter which will go toward capital needs. Management indicated they are in a very good financial condition going forward the rest of this year. The company is financing its remaining capital expenditure plan with its available cash balances of approximately $492.5 million Molycorp is in the process of modernizing and reopening the Mountain Pass mine in California which did produce rare earths up until the early 2000s. Currently, Molycorp produces 925 tonnes of rare earth products in the first quarter and sold 696 tonnes. It expects to produce up to 1,408 tonnes in the second quarter and said annual production would be between 4,541 and 5,813 tonnes. Independent forecasts estimate that global rare earth demand is expected to grow from 125,000 metric tons in 2010 to 185,000 metric tons in 2015, and 280,000 metric tons in 2020.

Obviously, management at Molycorp is very bullish about their future. Whether that means the stock will perform well is still up in the air. Looking at the prospects of the company and the analyst estimates, the stock is compelling. Earnings and sales are ready to explode. Last year, Molycorp lost money on $35 million in sales. This year, sales will accelerate to $378 million and to $637 million next year. Earnings will accelerate from a loss last year to $1.73 a share this year and $3.70 a share next year. Bu the stock is only trading for 13 times next years' earnings. If the story plays out as analysts expected, the stock should perform well, however, this is not a conservative play. Eventually more supply will come on the market, but that will not be the case for the next year or two unless China has a change in heart. Molycorp is geared toward a small position of anyone's portfolio looking at aggressive growth plays.