Update Yara International (YARIY)

10/26/2011 3:10 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Companies such as Cummins (CMI) are reporting big positive earnings surprises for the third quarter—11 cents a share above consensus for Cummins—and then seeing shares get slaughtered after warning investors about weakness in the fourth quarter. (Cummins, a member of my Jubak’s Picks portfolio http://jubakpicks.com/ , fell 5.1% the day of its news.)

Norwegian fertilizer maker Yara International (YARIY in New York or YAR.NO in Oslo) did just the opposite. The company announced a slight miss—with EBITDA (earnings before interest, taxes, depreciation, and amortization) coming in about 2% below consensus--about 2% warning investors about a weaker fourth quarter. But then signaled a stronger fourth quarter.

Yara International’s shares are up 4.4%, as of 12:30 p.m. in New York on October 26, since the company reported earnings on October 21. (Yara International is also a member of my Jubak’s Picks portfolio http://jubakpicks.com/.)

Of course, it didn’t hurt that Yara’s “bad” third quarter saw net income climb by 86% from the third quarter of 2010 (excluding currency effects and one-time items the increase was 83%.) EBITDA excluding special items grew by 66%. Not too bad no matter which way you dice it.

Yara International is riding a huge wave of rising prices for the value-added nitrate and complex nitrogen/phosphorus/potassium fertilizers that made up 60% of its sales volume in the third quarter. Prices climbed so fast (63% for nitrates and 31% for nitrogen/phosphorus/potassium fertilizers) that Yara International was able to keep ahead of a 38% increase in its cost of natural gas and oil. EBITDA margin increased to 16.8% in the quarter from 11.7% in the third quarter of 2010.

It also doesn't hurt that Yara International thinks that the slight weakness in third quarter volume resulted from farmers deferring purchases and that the company believes it will capture these deferred sales in the fourth quarter of 2011 or the first quarter of 2012 as farmers prepare for the spring planting season.

Cash flow at Yara International was strong enough that the company was able to reduce its net debt by about 40%.

Yara International doesn’t look like it will quite hit my previous target price of $53 by November 2011 (although today’s $48.02 isn’t that far off). But looking at the strength of Yara’s quarter and the trends, I get a new target price of $63 a share by October 2012. The ADR also pays a 2% dividend yield.

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 own shares of Cummins and Yara International as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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