What do investors do when a couple of good sets of numbers are followed by a two equally distasteful reports? They are left confused. This is exactly what happened to those who have money locked in some big fertilizer stocks.
After Mosaic's (NYSE: MOS ) and PotashCorp's (NYSE: POT ) impressive quarterly numbers, investors' expectations from CF Industries (NYSE: CF ) and Agrium (NYSE: AGU ) unsurprisingly ran high. While CF's stock gained 4% in the week prior to its earnings announcement, Agrium's stock tacked on 6% before release. Unfortunately, expectations fell flat on their faces. The result: All four stocks have stopped short in their tracks, leaving investors sulking. The $64,000 question is: What should investors make of the situation and what should they do now?
Same time, different situation
Both Agrium and CF Industries reported double-digit slump in revenue year on year in their respective last quarters. In sharp contrast, PotashCorp reported a solid 20% jump in top line for its first quarter. Mosaic had a softer 2% growth in sales, but its earnings grew at 26% clip year on year. What did PotashCorp and Mosaic do right that the others didn't? Nothing. It was all a matter of how different things were the same time last year.
PotashCorp and Mosaic rely on potash and phosphate nutrients for revenue, both of which are key export products. The two companies are leading members of the legal cartels Canpotex and PhosChem, which control the export of potash and phosphate, respectively. So their sales, to a great deal, depend on international markets. With China and India putting fresh contracts on ice last year on pricing issues, these companies had a tough time moving inventory and generating sales.
This time around, they had a couple of contracts to work on. North American potash producers recorded a staggering 74% jump year on the year in offshore shipments during the first quarter. Naturally, year-on-year comparisons looked great for PotashCorp and Mosaic.
Agrium and CF depend more on the North American market for sales. Exceptionally warm weather last year resulted in a surge in demand for nutrients as farmers in the U.S. rushed to plant earlier than usual. CF's Q1 2012 revenue surged 30% while Agrium reported a sparkling 35% rise in revenue for the same period. It was a record for both companies. With the weather in the U.S. back to normal this year, the first quarter turned out to weak for both companies, just like it should have.
So investors shouldn't read much into the recent misses and beats. Instead, they should focus on what's in store. Fortunately, there's some good news here.
Why you should buy
Expectations about this year's spring planting are shooting to the moon, with both CF and Agrium pitching for record planting of corn and soybean. CF's order book at the end of the first quarter was heavier by $700 million compared to the year-ago period, indicating solid demand for nutrients. These companies should be doing brisk business right now, especially because both derive a major chunk of revenue from the most widely applied nutrient -- nitrogen. CF even operated its ammonia plant at 100% capacity this past quarter in anticipation of robust demand. Meanwhile, prices of nitrogen are expected to firm up. Rising revenue should also help the companies offset higher costs of a key input -- natural gas -- in the event that gas prices move further up.
So which is it, CF or Agrium?
Agrium can make a lot out of a good planting season as it also sells seeds and crop protection products. Yet, the company's outlook doesn't seem to reflect any of the optimism. Agrium has provided an unusually wide range of $4.60-$5.40 earnings per share for the second quarter, which is uninspiring given that it earned $5.40 per share in Q2 2012. The tepid outlook is one reason why the stock lost ground post earnings announcement. But I think the pessimism is already baked into the stock price, and investors should consider initiating long positions at current level.
CF doesn't provide quarterly guidance but has left investors hopeful with the words "very positive for the second quarter". CF is banking on urea ammonium nitrate, or UAN, which makes up most of its sales volumes. UAN prices have also been on an upward trajectory in recent months, which bodes well for the company. CF's stock is just about 20% away from its 52-week low and is trading at a remarkably low P/E of six times.
Or is it the other two?
Canpotex's contract commitments to China and India will continue into the second quarter, so investors can again expect high offshore shipment numbers from PotashCorp and Mosaic. To investors' delight, PotashCorp expects to earn anything between $0.70 and $0.85 per share next quarter, which, if achieved, will be an impressive improvement over the $0.60 per share it earned same time last year. At 17 times P/E, PotashCorp might not be a bargain basement stock, but a handsome dividend yield of 3.4% makes up for it.
Though Mosaic didn't provide an EPS guidance for its next quarter, investors can safely remain optimistic. Mosaic follows an offbeat financial year wherein it will be reporting its fourth-quarter numbers in July. For the nine months ending February 28, Mosaic earned $3.29 per share, which is greater than $3.24 it earned in the comparable period last year. With the ongoing quarter expected to be a strong one, Mosaic looks poised to end its financial year on a high note. Though the stock is nearing its 52-week high, there appears enough room for upside at 13 times P/E.
And the award goes to...
While all four stocks look good, I'll pitch for CF Industries and Agrium at this point in time. Having lost significant value in recent months and trading below 10 times P/E each, they look promising. I'll soon give you a deeper insight into CF Industries and Agrium together with reasons why you should remain bullish on them. Keep watching this space.
In the meantime...
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