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Yara's Problems Are Behind It
04/25/2011 3:48 pm EST
Shares of Yara International (YARIY in New York and YAR.NO in Oslo) look like they’ve finally worked through persistent problems that sent the stock from a high of $60.15 (on January 18) to a low of $44.38 (on March 16). As I post this the shares are trading at $52.90.
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 3 billion Norwegian kroner (about $523 million). Analysts had been expecting something more like 3.8 billion kroner.
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.
Another part was the result of trends, such as higher energy costs, that were challenging companies across the sector.
But the biggest piece was a 165 million kroner writedown in the quarter, related to its joint venture Burrup Fertilisers, as a result of a Yara-initiated investigation into financial irregularities there.
In 2009, Yara had posted net income of 311 million kroner from its 35% stake in Burrup. In 2010, after the writedown, Yara’s net income from Burrup fell to negative 156 million kroner.
Yara’s actual quarterly report, released February 15, was slightly worse than even the February warning. EBITDA fell to 2.99 billion kroner, for instance.
And the report raised fears for 2011. Energy costs for the first quarter of 2011 would be 750 million kroner 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 that 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 a company such as Potash of Saskatchewan, which is focused on potash.)
Granular urea prices dropped from $420 per 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 costs 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 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.
So I’m adding the shares to my Jubak’s Picks portfolio with $60 as my target price for October.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Yara International as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
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