It has been a tough 12 months for investors in fertilizer stocks. The sector has consistently underperformed the overall market for the most part of a year (see chart below). These stocks have recently started to make a significant move up, however. The long-term secular trend of increasing demand for food in the developing world, as well as low natural gas prices (a major cost input), are still in place.
I believe the analyst community has been a bit too pessimistic about phosphate and potash pricing. This was demonstrated earlier this week when The Mosaic Co. (MOS) reported earnings that were a few cents ahead of estimates. More importantly, the prices Mosaic received for its production of potash and phosphate were both above the range analysts had previously estimated. Agrium Inc. (AGU) also raised its earnings forecast substantially Wednesday. This bodes well for the overall sector, and it will outperform the market in the coming months. Let's look at two fertilizer stocks in my portfolio.
Potash Corp. of Saskatchewan (POT) produces and sells fertilizers and related industrial and feed products primarily in the U.S. and Canada. Four reasons POT is a solid holding at $45 a share:
- Consensus earnings estimates for both 2012 and 2013 had already ticked up over the past month. Based on Mosaic's quarter and Agrium's positive guidance, I would look for a significant boost to Potash's estimates over the next few weeks.
- The stock is selling near the bottom of its five-year valuation range based on price/cash flow, price/book, price/earnings and price/sales ratios.
- Potash has grown its earnings at more than a 14% annual clip over the past five years. First Call also pegs the company's long-term growth rate at 14%. Investors can now purchase that growth for less than 12x forward earnings.
- The 26 analysts that cover the stock have a median price target of $53.50 a share. Dahlman Rose upgraded its shares to Buy from Hold in late June. I would look for further upgrades on the stock in coming weeks.
Mosaic (MOS) produces concentrated phosphate- and potash-based crop nutrients for the agriculture industry worldwide. Four reasons Mosaic still has further upside from $58 a share:
- In addition to beating earnings estimates, Mosaic announced it is doubling its annual dividend to $1 a share on an annual basis. The stock will yield 1.8% based on the new dividend structure.
- The 12 analysts that cover the stock have an $85 a share median price target. Based on the latest earnings report, I would look for that median price target to drift up over the next month.
- The stock is selling near the bottom of its five-year valuation range based on price/cash flow, price/book, price/earnings and price/sales.
- The company has a robust balance sheet with almost $3 billion in net cash on the books, is selling at 9x operating cash flow and just over 10x forward earnings.