Are Fertilizer Stocks Peaking, or Just Starting to Grow?

Ouch! Fertilizer stocks tripped a little today after earnings releases from both CF Industries (NYSE: CF  ) and Terra Nitrogen (NYSE: TNH  ) showed solid growth but failed to meet expectations. While both companies easily topped their 2010 results thanks to a rise in fertilizer prices, analysts had sky-high expectations for 2011 that weren't quite met. A combination of factors (see below) led to this miss, but it seems like a small speed bump on the road of a successful year. Read on to find out what it all might mean going forward.

Looking at the numbers
The bar for the agriculture sector was set high after Monsanto (NYSE: MON  ) smashed through expectations for its fourth quarter. However, Monsanto's unique position isn't quite replicated by commodity fertilizer companies, no matter how large they may be. Ammonia sales volumes were down 12% for Terra, while net volume at CF Industries was marginally lower. The reported declines come on the heels of a Reuters report released Monday that explored newly cash-flush Midwestern farmers boycotting fertilizers due to skyrocketing prices.

Here's how rising prices actually affected the bottom lines:

Metric	CF Industries Results	Terra Nitrogen Results
2011 Fourth Quarter Revenue	$1.7 billion	$201.0 million
2010 Fourth Quarter Revenue	$1.2 billion	$142.9 million
2011 Fourth Quarter Net Income	$438.9 million	$129.8 million
2010 Fourth Quarter Net Income	$200.3 million	$65.8 million
Quarterly Revenue Growth	41.7%	40.7%
Quarterly Net Income Growth	119.1%	97.3%
Quarterly Net Margin	25.8%	64.6%
2011 Full Year Revenue	$6.1 billion	$798.9 million
2010 Full Year Revenue	$4.0 billion	$564.6 million
2011 Full Year Net Income	$1.5 billion	$508.0 million
2010 Full Year Net Income	$349.2 million	$201.6 million
Annual Revenue Growth	52.5%	41.5%
Annual Net Income Growth	329.6%	152.0%
Annual Net Margin	24.6%	63.6%

Sources: Company earnings reports.

Although both companies did report volume increases for the full year, neither needed it for the fourth quarter, which was driven entirely on higher prices. Upset farmers have had a broad effect on the fertilizer industry, reducing Potash Corp's (NYSE: POT  ) nitrogen volumes a full 15% YOY in its most recent quarter. Mosaic (NYSE: MOS  ) , another major player, is cutting potash production during the critical spring season by 20%.

Trends to watch
Missing estimates isn't catastrophic when profits can remain strong. The only problems ahead are likely to come from unexpectedly steeper economic deterioration in the eurozone. Corn prices trended lower in August, but have been essentially flat since October. Farmers, expected to plant more corn than at any point since World War II, might have little choice but to pony up in order to keep their own profit streams flowing.

Terra was hit harder than CF today, and may continue to decline a bit more should it be unable to maintain its high dividend distribution, and could also be at greater risk should CF decide to sell off some of its majority stake while the stock is at a peak. CF is in a stronger position, but hardly offers the yield income-seekers want. Now might be the time to step back and evaluate a position in either company in a situation where historically high fertilizer prices finally drop.

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