Mosaic (MOS) of Plymouth, Minn., a leading fertilizer maker, is down 27% this year. Its competitors aren't doing much better. Potash (POT) has also fallen 27%. Agrium (AGU), based in Calgary, Alberta, has dropped 13%. CF Industries (CF), with headquarters in Deerfield, Ill., is down 5%.
All of these declines have happened in a year when the U.S. stock market has been rising briskly. The S&P 500 has risen 16% this year. Make that 18% if you count reinvested dividends. Taking dividends into account, Mosaic has underperformed the market by almost 44 percentage points.
What ails the fertilizer makers? A big chunk of the decline happened in late July, when the Russian fertilizer producer Uralkali withdrew from a producers' cartel, threatened to raise its production significantly, and said that potash prices could fall sharply.
Potash is no rare earth. It is a pretty abundant substance, and a major factor in keeping its price up has been the production restrictions imposed by two cartels -- one in Russia and Belarus (that's the one that Uralkali quit), and one in Canada.
But investors are ignoring the pluses.
- The demand for fertilizer hasn't declined: Farmers in the U.S. and around the world still want and need it.
- The supply may not increase as much as investors fear. The Uralkali threat is just that -- a threat, not a reality. BHP Billiton (BHP) of Australia and Vale (VALE) of Brazil, both major producers, may slow down new projects in Canada and Argentina, respectively.
- Natural gas, an important ingredient in producing nitrogen-based fertilizers, is plentiful and cheap in the U.S.
Mosaic, in particular, appeals to me. The stock sells for a modest 10x earnings. It has a decent dividend yield of 2.4%. And it has one of the stronger balance sheets in the group, with debt a mere 8% of stockholders' equity.
Analysts figure that Mosaic will earn $4.42 a share this year, the same as last year. That would be tied for the company's fourth-best earnings in the past decade. To make matters worse, the analytical corps expects a mild decline in earnings in 2014 and 2015.
Well, human beings are good at predicting things -- except for the future. My mentor, David Dreman, has written extensively on the failure of analysts to predict earnings with accuracy, even one year in advance, let alone two years or more.
In the fertilizer industry, I see a commodity for which there is constant and strong demand. In Mosaic, I see a reasonably consistent earner with attractive valuation selling for one-third of its price from five years ago. I believe it would make a good addition to many investors' portfolios.