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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.

All fertilizer, all the time 
Friday is looking to be a miserable day to own a fertilizer stock -- any fertilizer stock -- as ace agriculture stock analyst Dahlman Rose issues its latest round of prognostications on the sector. Across the length and breadth of the industry, Dahlman rained down pessimistic ratings this morning:

  • Agrium (NYSE: AGU  ) -- Sell
  • CF Industries (NYSE: CF  ) -- Sell
  • Potash (NYSE: POT  ) -- Sell
  • And, of course, Rentech Nitrogen (UNKNOWN: RNF.DL  )  -- Sell!

Fact is, the only fertilizer stock that escaped the analyst's ire even just a little bit was Mosaic (NYSE: MOS  ) , which somehow got off with only a downgrade to hold.

Why all the pessimism?, which reported the ratings this morning, quoted Dahlman to explain its moves thusly: "We believe that the best market conditions for [Nitrogen, Phosphorus, and Potassium fertilizers] are behind them as new capacity moves forcefully ahead." With India having just placed a couple big potash orders at prices ($427 a ton) a bit higher than expected ($416 a ton), prospects look "good" for the first half of this year, but "the industry maybe just one crop away from a significant earnings downdraft driven by crop and capacity issues." 

After all, even $427 is a steep discount from the $530 a ton that Canpotex (which represents Potash, Agrium, and Mosaic on potash deals) was able to negotiate with India a couple years ago. Plus, with corn prices on the decline, and record acreage being planted this year in the U.S., it's possible farmers will have less cash to spend on fertilizer this year, than investors might like.

Should we be worried?
How worried should you be about all of the above? In a word: very. First, the analyst making these predictions for potash, nitrogen, and potassium fertilizers is no babe in the woods, or even in the cornfields. While overall, Dahlman Rose is a pretty useless investment banker, sporting a long-term average record for accuracy of less than 40%, and ranking in the bottom 20% of investors we track on CAPS, there is one area in which Dahlman positively shines: fertilizer stocks.

Within this small niche of the market, classified as "chemicals" on CAPS, Dahlman boasts a sterling record of 75% accuracy on its picks and a combined record of 232 percentage points worth of outperformance of the S&P 500 over the past four years.

Quite simply, Dahlman's performance in this field has earned it some respect, and the right to be listened to when it warns investors not to buy shares of Potash and Agrium, Rentech, and CF -- and to be careful about Mosaic as well.

Valuation matters
Dahlman's opinion is also (largely) supported by the numbers. Across the industry, most fertilizer stocks sell for valuations ranging from 16.5 (Potash) to 12.1 (Agrium). Mosaic, the only stock Dahlman is even remotely optimistic about, sits in the middle of the pack at 13.2.

By themselves, these valuations don't look too awfully bad. But remember that projected growth rates for the fertilizer producers are anything but robust. Agrium and Mosaic "boast" projected growth rates of just 7% and 8%, respectively. Potash, only 5%. (Rentech breaks the curve with a 12% profit growth rate, but seeing as it currently has no free cash flow, it's hard to say what that "growth" is really worth.)

Remember, too, that most of these stocks fall far short of the goal of generating free cash flow in line with their reported GAAP income. Rentech is worst in this regard -- actually burning cash even as it claims to be earning $110 million a year on its income statement -- but Potash, Mosaic, and Agrium all generate a whole lot less profit than they let on.

Foolish takeaway
Honestly, I agree with most of what Dahlman is saying about these stocks today. For the most part, they're not as good as they look. If I've got one quibble, though, it's that the analyst is too easy on Mosaic (whose numbers are just as bad as most of the rest) and too hard on the only stock on the list that presents a bargain: CF Industries.

Priced at a P/E ratio of just 7.2, CF is easily the cheapest stock on the list. Meanwhile, with a projected long-term growth rate of 12%, it's tied with Rentech as the group's speediest grower. Best of all, with $1.85 billion in trailing free cash flow, CF Industries is the only fertilizer company out there -- literally, the only one -- currently making more cash profit than it's claiming to have earned under GAAP.

To my Foolish eye, it's the only one of the five you should even consider buying.


With less and less arable land available around the world, increasing yields from existing plots will become increasingly important to keep up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has several barriers to entry established that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's new premium research report on PotashCorp, in which we cover precisely what these barriers to entry are and detail several other key reasons why this company presents such a compelling investment opportunity today.

Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2013, at 9:23 PM, OrigJockhead wrote:

    Well their record you speak of seems a bit confusing. It pretty much shows signs of "we don't know what we are talking about". Here are their recent up/down grades on RNF:

    Feb 21,2013 Dahlman Rose Downgrade Buy Sell

    Jan 24, 2013 Dahlman Rose Upgrade Hold- Buy

    Aug 1, 2012 Dahlman Rose Downgrade Buy- Hold

    Jun 24, 2012 Dahlman Rose Upgrade Hold- Buy

    So in another 30 days they are going to say buy again? I wouldn't hang my hat on Dahlman like you fact, I am worried about why you feel you should.

  • Report this Comment On February 23, 2013, at 10:34 AM, abbaman7 wrote:

    DR says we could be one crop away from a major earnings collapse among the fertilizer companies. I think I heard something like that last year too. And this is one of those mantras which can be repeated every year. The problem with this is that there is no "crop" until it is in the bin. Last year's drought in the U.S., for example, made mincemeat of any such prognostication. What is the weather going to be like during the key growing seasons in 2013? I have no idea and neither does DR. The only thing I know is that if you don't put something in the ground, you don't eat. It doesn't require a Magic 8 Ball to see that the major fertilizer companies are all massively increasing their dividend yields. Now why might they be doing that if they are one crop away from disaster? I grant that these stocks, with a few exceptions, have been relatively lousy investments during the last few years and that they may continue to be lousy investments going forward. Still, I doubt that DR has plumbed the depths of the matter because I find their analysis too pat and breezy.

  • Report this Comment On February 24, 2013, at 3:10 PM, KGaider wrote:

    If you look over the past 4 years nitrogen companies have been great investments. As for DR I find it hilarious that anyone even listens to their ag analyst as his analysis the last 3 years in a row is so full of holes and clearly shows a COMPLETE lack of knowledge of fertilizers and crops. Also note that the USDA has had a similar dismal record of accuracy.

    Most recently the CEO of CF stated that due to delays in startups of new ammonia / uan plants in NA and globally that ammonia supplies will be firm to tight and uan supplies will be very tight. Thus pricing will be firm and increasing.

    As well, all but UAN must shut down this year for maintenance - further restricting supplies of ammonia / uan.

    Both of the above are happening at a time when there will be more corn than ever planted PLUS a large amount of global winter wheat crops have been heavily damaged thus requiring more spring wheat to be planted. The first thing that gets applied to the land of these crops is anhydrous ammonia.

    In addition crops are now being planted on poor soils which require substantially more than the normal ammount of N fertilizer application as does previously good land which has not been allowed to rest.

    Final point is that all land is still badly droughted from last year and for just a NORMAL crop, never mind a bumper crop, areas will require anywhere from 8 to 16 inches above normal precipitation.

    Now this could happen but if it does more likely it will cause just as much damage due to too much rain at once or too much at the wrong time.

    Now if that DR analyst is that competant should he not have known a month ago when he did all the UPGRADES that all that supposed extra ammonia production would be coming onstream ? I mean you can't build a bunch of ammonia plants in one month. Also what evidence has he presented that 8 to 16 inches above normal rain is going to fall and conviniently in the correct amounts / timing and locations ? The same comments apply to the overly optimistic PREDICTIONS of the normally BADLY WRONG USDA.

    And YES last year about a month after DR downgrades they then flip flop again and do their wild upgrades so while people are foolish enough to give any credit to DR and USDA consistantly wrong fairy tales you all might be better off starting to nibble and then sit back and wait for the upgrades and for all the panic buyers to frantically come back in ... that's what I'm doing.

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