Fertilizer Is More Than Manure

06/23/2008 12:00 am EST

Focus: STOCKS

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, editor of Blue Chip Growth, says fertilizer stocks are some of the biggest beneficiaries of the food-price boom, and he recommends two he says will gain more.

Recently, The Wall Street Journal reported that the price of fertilizer soared a whopping 65%. That may explain part of the reason why food costs have also soared, as that expense is passed on to consumers. Since they deal in fertilizer, the current market conditions are good news for new buys Agrium (NYSE: AGU) and CF Industries Holdings (NYSE: CF).

The US is a world leader in corn production; however, planting is down 7% this year despite record prices. The most recent reason for soaring corn prices has been flooding in Iowa. Prices climbed further into record territory last week after more rain doused the Midwest, leaving flooded corn crops deeper under water and threatening livestock owners who depend on the grain to feed their herds. There is clearly no way to mitigate all these factors, which are pushing corn prices higher and higher.

Due to the weak US dollar, rising demand, the growing biofuel industry, and increasing speculation, it appears that there is no immediate relief to the soaring prices for food, so I remain very comfortable with our agriculture stocks. This planting season is already over, so not a lot can change until next year. Our current picks in the agricultural sector are safe bets, so they will allow us to reap rewards even during this period of market instability.

Agrium is a top producer and marketer of fertilizers in North America. As a leader in the production of nitrogen, the company operates plants in Canada, the US, and Argentina. These plants have the capacity to produce more than eight million tons of the nutrients per year. In addition to supplying wholesalers, Agrium operates more than 400 fertilizer retail outlets.

Last quarter, Agrium's earnings soared $1.23 per share compared with a loss of eight cents per share the year before. Sales rose 35.2% to $1.11 billion, compared with $821 million. Wall Street was expecting first-quarter earnings of 55 cents per share and sales of $1 billion, so Agrium posted a 123.6% earnings surprise and an 11% sales surprise.

The company has been benefiting from positive analyst upgrades and trades at barely 11x this year's earnings. Agrium is a great buy below $118. (It closed under $109 Friday-Editor.)

CF Industries is a regional agricultural firm that manufactures and markets nitrogenous and phosphate fertilizers. The company operates a network of manufacturing and distribution facilities, primarily in the Midwest. Before it began to trade publicly in 2005, the company had been owned by eight regional agricultural co-ops, including Land O'Lakes, Growmark, and CHS.

Fertilizer companies are prospering because farmers need to boost crop yields to meet the global demand for food. CF is no different, benefiting from positive analyst upgrades and trading at less than nine times forecasted earnings. The stock is a great buy below $176. (It closed under $167 Friday-Editor.)

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