Giant Minnesota agricultural cooperative CHS (Cenex Harvest States) is now late with their original estimated late filing with the SEC for the year ending August 31, 2018. The company had previously stated they would hope to have the filing submitted by 11/29/2018 (yesterday)–but as of this moment no filing is found. Investors almost always assume the worst from a late filing–and to be later than the announced ‘hoped for date’ just adds fuel to the fire.
Recently (in October) the company announced that an employee had performed an act of fraud on the company and earnings were likely overstated by a total of $190 million over the course of 3-4 years. Additionally this caused assets to likely be overstated by around $200 million. Needless to say this event raises questions about how a singular person could execute a large fraud over a number of years without it showing up in an audit–obviously very materially poor checks and balances.
CHS is a $30 billion dollar revenue coop with total assets of $17 billion and as such this is a minor event—BUT anytime something like this happens it calls into question the competence of management and the financial systems in place. Additionally previously, in 2015, the coop made an ill advised investment in fertilizer maker CF Industries after raising funds for their own $3.3 billion dollar nitrogen plant-which was subsequently cancelled. This investment has been nothing short of a disaster.
Fortunately CEO Carl Casale was shown the door in May, 2017. Mr Casale was an utter disaster. In addition to the above a CHS affiliate in Brazil went bankrupt in 2017 and CHS was ‘surprised’ by the bankruptcy–this cost the coop $200 million.
In spite of the continual missteps the company had profits of $576 million for the 1st 9 months of 2018. A strong balance sheet can mask a lot of poor management.
Recall that the company has numerous preferred stock issues outstanding and had been a ‘darling’ of investors for many years. Those shares, which had already been knocked lower simply because they are perpetual preferreds continue to trend lower.
The CHSCM 6.75% Reset Preferred are now trading under $25 as shown below (as called to our attention reader aarod)
At this point the CHS preferreds are moving into the ‘show me’ stage. Show me that you have fixed the issues–show me you don’t have more issues–show me you aren’t such damned fools.
We await the recent financials and could initiate a tiny new position depending on the filing. We say tiny because we need a higher level of confidence in management. The balance sheet has been stellar–but is it real–we certainly hope so.