Fertilizer makers have generally underperformed the overall market over the last 12 months; however, they are well-positioned for the long term.
Hundreds of millions of people in the developing world are moving out of poverty. As they do, they will demand, and be able to afford, more protein and a higher quality and quantity of food. Given the growing overall world population and a limited amount of arable land, producers of products that boost food output per acre hold the catbird's seat over the long term. Fertilizer is a key component to boosting crop yields because 40% to 60% of yield is determined by crop nutrients. I particularly like North American fertilizer makers to benefit from this secular trend. They are in close proximity to some of the most productive arable land in the world in the Midwestern U.S. and in Canada. They also have access to the lowest cost natural gas in the world, and this input usually is at least 20% of operating costs.
The sector will get a nice boost from Canadian fertilizer Agrium's (AGU) announcement Thursday that it raised quarterly earnings guidance to $2 per share on the back of strong North American demand. The company's previous guidance was in a range of $1.50 to $1.90 per share and the consensus analyst estimate was for $1.73 per share, so that was a substantial raise.
I like several fertilizer makers here, including Potash (POT) and CF Industries Holdings (CF). But my favorite pick in the sector is The Mosaic Co. (MOS), even after its recent run. It produces and markets concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. The company also offers phosphate-based animal feed ingredients.
Four reasons Mosaic still offers compelling value at $60 a share:
- The stock is selling near the bottom of its five-year valuation range based on price-to-sales, price-to-cash flow and price-to-book ratios. The stock also yields 1.7%. It also has quintupled its dividend payouts in the last 18 months.
- The company is a major beneficiary of emerging market demand. It is also a major player in Brazil, and Latin American sales increased 18% in the last reported quarter.
- Net cash on the balance sheet (roughly $2.5 billion) and operating cash flow have roughly doubled in the last three fiscal years.
- The median price target of the 12 analysts that cover the stock is $85 a share and the stock sells at a very reasonable 11x forward earnings.