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Not all fertilizer stocks are created equal
11/07/2012 6:26 pm EST
A reminder of that from the fertilizer sector this week. Investors tend to lump all fertilizer stocks together. Most of the time that works just fine as demand for all kinds of fertilizer is driven by the state of farm incomes and crop forecasts.
But sometimes it doesn’t as supply and cost for different types of fertilizer move in different directions. The earnings reports from Agrium (AGU) on November 7 and CF Industries Holdings (CF) on November 5 indicate that this is one of those times.
Agrium reported disappointing earnings and then lowered guidance for the fourth quarter. Third quarter earnings of $1.34 a share were 48 cents a share blow the Wall Street consensus. In the fourth quarter the company told investors to expect earnings of $1.50 to $1.90 a share vs. the $2.07 a share Wall Street consensus.
The obvious problem was the company’s retail operation where sales fell to $1.8 billion from $2 billion in the third quarter of 2011. Sales of seeds fell by $29 million from the third quarter of 2011 and nutrient sales dropped by $58 million to $634 million.
But the big problem reflected in the retail (Agrium is the only fertilizer company that operates its own chain of stores selling seeds, fertilizer, and pesticides and herbicides) and wholesale operations was in potash. On the retail side severe drought in the United States cut into demand—total fertilizer volumes fell 11%, the company said. On the wholesale side potash volumes fell as the company executed planned cuts in production in order to expand future production at its Vanscoy plant and as the company ran into mining challenges.
Potash sales volumes fell to 160,000 metric tons in the quarter from 347,000 tons in the third quarter of 2011. Lower capacity utilization rates pushed up potash costs per ton to $363 from $188 in the third quarter of 2011.
I think Agrium will work through those short-term problems and is on track to expand potash sales volumes by 50% over the next five years. But on that time scale the company will run into a problem facing all potash producers—supply of potash looks likely to grow faster than demand as more companies bring new production on line. That will mean falling potash prices.
Contrast that to the much more optimistic report from CF Industries. The company reported earnings of $5.85 a share (after subtracting a 39 cents a share pre-tax gain on natural gas derivatives and an 11 cents a share gain on employee retirement benefits.) That beat Wall Street’s estimate of $5.82 for the quarter.
In its conference call the company called its order book for its nitrogen fertilizer segment “attractive” and said demand supply for ammonia, the main nitrogen fertilizer feedstock, is tight.
But the big take-away was the company’s belief that it would continue to see benefits on its bottom line from low prices of natural gas. (Unlike potash and phosphate fertilizers, which begin with mined minerals, most nitrogen fertilizers are made by combining nitrogen from the air with hydrogen from natural gas to produce ammonia, which is then used as a feedstock to produce nitrogen fertilizers. Some nitrogen fertilizers are still made from mined sodium nitrate.) Lower natural gas prices contributed to an increase in gross profit per metric ton to $216 in the recent quarter from $181 in the third quarter of 2011.
The troubles at fertilizer “peers” such as Agrium have helped push shares of CF Industries down to a close of $201.99 from $224.51 on October 1 and $210.88 on November 1. I think the stock would be very attractive at $170. It might get there on disappointing news from potash producers.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Agrium or CF Industries as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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