Fertilizer Companies Exposed by Earnings

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Mosaic (NYSE: MOS  ) , CF Industries (NYSE: CF  ) , and Agrium (NYSE: AGU  ) all released third quarter earnings this week, and in doing so showed the vulnerability of the fertilizer industry as a whole. Across the board, earnings and revenue in the sector were down due mostly to weakened demand for fertilizer. The reliance of these companies on a single product makes them extremely susceptible to changes in demand, and third quarter earnings exposed this point clearly. Investors should use this information as a caution sign, but Mosaic, CF Industries, and Agrium still all have the base needed to return to earnings and revenue growth.

Earnings summary
In not much of a surprise, Mosaic reported a substantial decline in third quarter earnings and revenue, largely due to lower potash and phosphate prices. CF Industries reported a 42% decline in net income based mostly on a decline in phosphate and nitrogen demand. Likewise, Agrium's third quarter net earnings were over 40% lower than a year ago.

The poor quarterly results were expected across the fertilizer sector and were anticipated by the investing community. However, when compared to 2012 Q3 results, the collective earnings reports seem even more unnerving. Investors can ease their minds knowing that earnings and revenue in the fertilizer commodity market are relatively easy to project based simply on supply and demand and the directly associated price of fertilizer products. The fact that analyst estimates and the companies' own guidance matched well and were in some cases even beat by the quarterly results implies that investors should not be overly worried about the fluctuations in revenue and earnings over the short term.

Looking separately at the big three nutrients
Looking at the fertilizer industry collectively does not always yield the same analysis as when nitrogen, phosphates, and potash are looked at individually. In general, international demand for fertilizer products is more difficult to project than domestic demand, though domestic pricing is more difficult to anticipate.

Mosaic is the dominant supplier of phosphate nutrients and is a major potash supplier, while having very little direct play in nitrogen. CF Industries has taken the opposite approach by essentially getting rid of its phosphate holdings to focus on nitrogen. Agrium is the most diversified of the above-mentioned companies, both in overall product offerings and specifically in fertilizer, with production and sales of potash, phosphate, and nitrogen.

The growing price of potash over the past decade has prompted an increase in supply while simultaneously slowing global demand. As the existing oversupply of potash is consumed, Mosaic and other potash producers like Potash Corp (NYSE: POT  ) should eventually see the price increase, which will lead to greater profits. The uncertainty remaining is in regards to how long this process will take.

Phosphate prices and global supply and demand tends to roughly follow the trends seen for potash. However, global demand over the next three years for phosphate fertilizers is expected to lag behind demand for potash. Other considerations notwithstanding, this may enable Potash Corp to recover back to stronger earnings and grow revenue more quickly than Mosaic.

The global market for nitrogen is a complex system that can change from season to season based on climate, natural gas prices, crop prices, and other variables that go far beyond the supply and demand considerations taught in high school economics. The higher-margin Corn Belt market is a major dictator of current fertilizer prices domestically, but the major growth in nitrogen consumption expected in the next 3-5 years is projected to be mainly in Asian markets with very small growth projected in North America. A lot of money and resources are put into accurately predicting the recovery of nitrogen prices both domestically and internationally, and in the end the projections can be invalidated by small shifts in natural gas prices or unexpected seasonal yields.

Back to bigger profits
With its biggest interest in phosphates, Mosaic may take a little longer to recover from the current oversupply, though the cyclical nature of fertilizer prices and the production benefits of their recent acquisition of CF Industries' phosphate holdings will help to speed up the process.

CF Industries doubled down on nitrogen when it sold off its phosphate interests to Mosaic. As part of the deal, it arranged purchase agreements with Mosaic that have created a built-in domestic market for its products. As nitrogen prices rise, CF Industries' domestic presence will help to make the 2013 third quarter results an isolated case of poor earnings.

Diversification will help to stabilize Agrium, though the agriculture industry as a whole has been negatively affected by lower crop and fertilizer prices. Agrium has not been immune to these effects, but with a relatively smaller holding in phosphates, it should be primed to recover quickly from the poor quarterly results.

Looking for more growth?
This incredible tech stock is growing twice as fast as Google and Facebook, and more than three times as fast as and Apple. Watch our jaw-dropping investor alert video today to find out why The Motley Fool's chief technology officer is putting $117,238 of his own money on the table, and why he's so confident this will be a huge winner in 2013 and beyond. Just click here to watch!


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2715005, ~/Articles/ArticleHandler.aspx, 9/26/2016 3:12:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,108.97 -152.48 -0.83%
S&P 500 2,147.47 -17.22 -0.80%
NASD 5,262.59 -43.16 -0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 2:56 PM
AGU $90.23 Down -1.43 -1.56%
Agrium CAPS Rating: ****
CF $22.55 Down -0.09 -0.38%
CF Industries Hold… CAPS Rating: ****
MOS $24.25 Down -0.57 -2.30%
Mosaic CAPS Rating: ****
POT $15.94 Down -0.01 -0.06%
PotashCorp CAPS Rating: ****