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Buy Yara International (YARIY)
04/25/2011 2:50 pm EST
The problems go back to February when the company issued a warning that fourth quarter EBITDA (earnings before interest, taxes, depreciation, and amortization) would total just NOK 3 billion (that many Norwegian Krone equals about $523 million). Analysts had been expecting something more like NOK 3.8 billion.
A bit of the shortfall was intentional: Yara said it had deferred some sales into 2011 in order to take advantage of a rising trend that promised higher fertilizer prices in 2011.
Part was a result of trends, such as higher energy costs, that were challenging companies across the sector.
But the biggest piece was a NOK 165 million write –down in quarter related to its joint venture Burrup Fertilisers as a resulted of a Yara-initiated investigation into financial irregularities at the joint venture. In 2009 Yara had posted net income from its 35% ownership of NOK 311 million. In 2010, after the write down, Yara’s net income from Burrup fell to a negative NOK 156 million.
Yara’s actual quarterly report released in February 15 was slightly worse than the February warning. EBITDA fell to NOK 2.99 billion, for instance.
And the report raised fears for 2011. Energy costs for the first quarter of 2011 would be NOK 750 million higher than in the first quarter of 2010. The company argued that this cost increase would be more than offset by higher fertilizer prices in 2011, but investors were understandably not willing to cut the company much slack.
It didn’t help the company or its shares either than urea, a nitrogen release fertilizer and one of Yara’s major products, fell in price during the first weeks of 2011. (Yara concentrates on nitrogen fertilizers such as urea, nitrate, or NPK complex products unlike, say, a company such as Potash of Saskatchewan, which is focused on potash.) Granular urea prices dropped from $420 a metric ton in early January to $360 a ton in March. That seemed to say that Yara’s talk of higher prices to offset higher energy costs to produce its nitrogen fertilizers was just wishful thinking.
But around the end of March prices for urea started to firm and farmers are now seeing quotes of $450 to $470 a ton for delivery from April to July. And it looks like the prices for other nitrogen fertilizers will follow by June or so.
With that price trend and with the continued climb in farm commodity prices I think Yara has a good chance of challenging its 52-week high of $60 within the next six months or so for a 14% return in that period. I’m adding the shares to Jubak’s Picks that as my target price for October. http://jubakpicks.com/
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, may or may not now own positions in any stock mentioned in this post. At the end of March the fund owned shares of Yara International. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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