POT Update: How Much Goes to the Rest?
05/07/2014 5:30 pm EST
How much of an effect will this leading Norwegian fertilizer maker's extremely strong earnings report have on the rest of the sector, ponders MoneyShow's Jim Jubak, but he also offers a possible solution to the puzzle.
Ever since Yara International ((YARIY) in New York and (YAR:NO) in Oslo) reported extremely strong earnings and revenue for the first quarter on April 30, I've been trying to figure out how much of this performance I could safely extrapolate to the fertilizer sector as a whole. The May 6 earnings report from fertilizer peer Mosaic (MOS) says...not much.
Yara did so well because it is focused on the non-potash fertilizer market. Mosaic-along with other potash producers such as Potash of Saskatchewan (POT)-continues to struggle with low prices and slow volume growth. (Potash of Saskatchewan is a member of my Jubak Picks 50 portfolio. I owned Yara International in my 12-18 month Jubak's Picks portfolio until I sold on April 11, 2012.)
Yara beat analyst expectations for earnings by 25.8% (in local currency terms) for the March quarter. Global fertilizer deliveries were up 21% from the March quarter of 2013. Excluding the effect of Yara's acquisition of Bunge's (BG) Brazilian fertilizer operations, global deliveries were up by 11%. (Yara expects to have fully integrated Bunge's Colombian operations by the third quarter of 2014.)
Unlike Potash and Mosaic, Yara concentrates in the nitrogen fertilizer markets. (Potash is mined. Nitrogen fertilizers are produced from natural gas.) Nitrate deliveries were up 8% and compound NPK (nitrogen, phosphorus, and potassium) deliveries were up 14%. Realized prices fell by 12% and 10%, respectively, but natural gas prices in Europe reduced costs by $6.1 million in the quarter. (Yara projects that lower natural gas prices will reduce costs by $101 million in the June quarter and $76 million in the July quarter. These estimates are based on forward prices as of April 22. I don't know how events in Ukraine will effect natural gas shipments from Russia to Europe. Norway has its own very large natural gas resources and is a net exporter of natural gas. But any problems with Russian supplies will raise the price of Norwegian natural gas too.)
Yara also benefitted from its relatively stronger concentration in Europe versus the North American focus of potash producers such as Mosaic and Potash of Saskatchewan. The European growing season has been ahead of schedule, in contrast to North America where extremely cold weather has delayed the season. The early season in Europe may have pulled some demand forward into the first quarter from the second, but the company reported a strong European order book for the remainder of the 2014 season.
Much of this was in strong contrast to the results Mosaic reported on May 6. Mosaic reported that it saw prices for potash fertilizers leveling off as the cold North American spring weather improves. Potash volumes do remain behind plan, however, and potash prices are still near the floor established at the end of 2013. That's good news, in the sense that, potash prices are no longer falling but the company hasn't yet seen enough of a pick up in volume to cut into the excess capacity in the potash sector.
It's always tough to figure out if an individual stock can move up strongly even if its industry as a whole suffers through sluggish growth. That's especially hard in this case, because it's not clear to me the degree to which investors lump Yara International in with the potash producers and the extent to which they see the company as engaged in a different market.
Yara International has outperformed Potash of Saskatchewan and Mosaic over the last 12-months (a gain of 5.82% versus losses of 11.34% and 19.1%, respectively) but Potash has outperformed Yara International since February.
Quite a puzzle. If you're looking for steady growth, I'd go with Yara International. The stock doesn't depend on a turn in potash prices for appreciation. If you're looking for a potential rocket, go with Potash of Saskatchewan. If (when) potash prices turn, this one will run hard and fast because it has been hit so hard by the fall in potash prices.
Now, if I only knew when potash prices would turn-and by how much.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Mosaic, Potash of Saskatchewan, or Yara as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund's holdings almost totally to cash.