At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
CIBC sees a future for fertilizer
Here we go again. Another 100-degree day in the Midwest, and another analyst peeking at the mercury and thinking he sees an opportunity to profit. Today, our featured stock is PotashCorp (NYSE: POT ) -- premier producer of nitrogen, potassium, and phosphate fertilizers for the agricultural industry. And our featured analyst is investment banker CIBC (short for Canadian Imperial Bank of Commerce) World Markets, which last week broke from the pack of fertilizer fans on Wall Street and downgraded PotashCorp to "sector perform."
What has CIBC so down on fertilizer? As the analyst explains: "Global demand is expected to remain flat year-over-year [and] we expect potash pricing to follow suit." CIBC sees Brazilian demand as a "bright spot," but more generally, Chinese potash supply contracts are expected "to be rolled over at $470/t" while the prices India pays will fall, coming in line with Chinese prices. In North America, prices are "unstable."
The market hates uncertainty...
No surprise on that last one. It's not at all easy to make sense of what's going on in U.S. agriculture today. According to the U.S. Department of Agriculture, the percentage of U.S. cornfields producing "good-to-excellent" yield this year will be only 48%, versus an expected 56% just one week ago.
On the other hand, if you've taken a look at a drought map of the U.S. lately, you've probably noticed that considerably more than 48% of the U.S. is practically glowing red-hot right now. I suspect most investors aren't thinking too much about "good-to-excellent" anymore. We're wondering how many corn fields will range from "poor" to "parched" to "just plow the stuff under before it bursts into flame."
It's this worry that has helped to push up share prices on America's fertilizer stocks (PotashCorp included) by more than 10% since we looked at them just one month ago:
Free Cash Flow as a % of Net Income
|CF Industries (NYSE: CF )
|Agrium (NYSE: AGU )
|Mosaic (NYSE: MOS )
|Rentech (NYSE: RNF )
...and false certainty, too
And yet, what if the maps are wrong? What if things aren't really as bad as what we're seeing in the headlines and hearing on the nightly news? After all, despite all the doom and gloom (and heat and glare) the USDA is still predicting that American producers as a whole will average 146 bushels per acre this year. This isn't all that much worse than what we reaped over the past couple of years.
And that could be a problem. Consider: The logic behind surging fertilizer stocks is that consumers will face a corn crunch this year. In which case, farmers should both: (a) reap high profits from the rising price of the corn that does grow, and (b) invest this profit in extra fertilizer to try to grow a bigger crop next year (to restock the nation's silos).
Logical? Sure. But if the corn crop is as good as the USDA is predicting, then this argument could still get blown away like chaff on the wind. And that wouldn't be good news for fertilizer stocks.
My advice: Bad news for crops has been good news for PotashCorp and its peers, driving the shares beyond fair value. That makes now a good time to take profits and wait for better prices -- because good prices will come again, make no mistake. In the meantime, if you absolutely, positively must buy a fertilizer stock, at least hedge your bets and buy a cheap one. For the time being, CF Industries remains the cheapest of the bunch. It's the only one I'd even consider buying today.
Meanwhile, if you're looking for further Foolish insight into the fertilizer miners, Fool blogger J.A. Graham recently penned an in-depth evaluation on major trends in the industry. Read all about it in the new blog post "Fertilizer's Moment of Pretzel Logic."
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