Growing Money With Potash

Fertilizer isn't sexy. Fertilizer companies do not have the same luster and popular fascination that Tesla Motors and Apple have. Consequently, they aren't as commonly discussed (or traded) among casual investors. What Agrium (NYSE: AGU  ) , CF Industries (NYSE: CF  ) , Potash Corp (NYSE: POT  ) and other big fertilizer companies lack in broad appeal, however, is made up for with a consistent commodity market that equates to consistent earnings. Potash Corp and the other biggest fertilizer companies have the potential to grow, and they may be worth planting in your portfolio.

There is no love for fertilizer
In general, fertilizer does not see a lot of investment activity. Agrium and CF Industries are both big companies by most any definition, having respective market caps of $12.3 billion and $11.8 billion. Their average daily trading volumes hover around the 1 million mark. By comparison, smaller but flashier companies like First Solar see daily trading volumes nearly 4x greater. 'Sexier' large-cap companies like Tesla see daily volumes topping 10 million. A lot of analysis can go into trading volume, but from the simplest view, Agrium and CF Industries are just not that actively traded.

If the unwritten rule states that fertilizer companies can't be sexy, then Potash Corp is the clear exception to the rule.

Who can you love?
Commodity markets favor companies that produce the largest amount of the product at the lowest cost. Potash Corp is the biggest of the big fertilizer companies, and that alone makes it a considerable play in the sector. It provides one-fifth of the global supply of potash, a market that is projected to increase at a moderate 3.5% rate over the next few years.

Nonetheless, like its competitors in the field, Potash Corp has seen a big hit to its stock price in the past few months due to a complex set of issues including questions over corn prices, political uncertainty in Belarus and the US, and saturation of the fertilizer market, among other issues. All of these issues intermingle to affect potash sales.

As a result, Potash Corp recently lowered its third quarter guidance. What investors should not lose sight of are the general trends in earnings over the past several quarters, as well as the fact that third quarter earnings projections are still relatively positive at $0.41 per share. Combined with a generous dividend currently at 4.4% and an active share buyback program, Potash Corp is one of the safest players in the fertilizer market, regardless of short-term market conditions.

Agrium and CF Industries have seen similar declines in market value since the beginning of the year. Unlike with Potash Corp, the decline isn't as directly correlated to the Belarus debacle due to both companies having significantly less presence in the potash market. Agrium and CF Industries are more rooted in the North American market, which is more nitrogen- and phosphorous-based, as opposed to the more international potash market. In any case, both Agrium and CF Industries have followed Potash Corp's lead through the offering of dividends, while demonstrating consistent earnings and attractive earnings ratios in otherwise uncertain economic conditions.

The takeaway
While Potash Corp and other fertilizer companies may not be fodder for discussion around the proverbial water cooler, dependable earnings and strong dividends make all of these companies worthy of consideration to feed into your portfolio. Potash Corp, being the biggest of the bunch and having recently taken a hit in market value, makes a strong addition to most portfolios looking for steady, long-term returns.

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  • Report this Comment On October 17, 2013, at 7:58 PM, RickRickert4MVP wrote:

    As a former POT shareholder, it seemed like POT always underperformed versus Mosaic. Im going to avoid this industry until we see potash prices improve.

  • Report this Comment On October 20, 2013, at 7:32 PM, RicoSuav1 wrote:

    Shamus - a couple of your contentions are inaccurate:

    1) CF has not seen the same diminution in value as PotashCorp, Agrium or Mosaic. Through the date your article was published CF's stock price had appreciated 3% YTD vs. -22% for PotashCorp, -17% for Arium and -18% for Mosaic.

    2) Your point about "consistent" earnings by PotashCorp is misleading. As of April 25, PotashCorp was forecasting $3 in 2013 EPS. By July 25 that forecast was reduced 14% at the mid-point of their new guidance to $2.58. As of October 11, they reduced their Q3 guidance by 11 cents and said they would not be updating their full year guidance until Thursday's earnings release. It would be prudent to assume that that full year guidance will be declining by more than 11 cents.

    While the cheaper PotashCorp gets the more interesting it becomes, PotashCorp is the most exposed to Potash of any of its peers (and has spent more heavily on Potash expansion than any peer). While all fertilizer pricing has been weak due to fears about a robust corn crop's impact on future corn plantings, the near-to-medium term prospects for Canpotex (the marketer PotashCorp's, Mosaic's, and Agrium's potash) appear very murky.

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