2 Reasons to Be Bullish on Fertilizer Companies

Fertilizer producers like PotashCorp, CF Industries, and Mosaic have had a rough time over the past year. Abundant supply amid sluggish demand crippled industry profits, and the unexpected breakup of a key selling alliance destroyed investor confidence. Can the sector recover? There is evidence that things may be improving for these companies and that their share prices may have upside.

Jan 27, 2014 at 11:50AM

Fertilizer, or crop-nutrient, companies like PotashCorp (NYSE:POT), CF Industries (NYSE:CF), and Mosaic (NYSE:MOS) have endured a volatile 2013. Coming off a tough year that included an acrimonious partnership breakup and a slump in industry profitability, these companies may have better times ahead. A couple of subtle yet consequential changes in the sector could produce improved profits and higher share prices.

Enduring a difficult 2013
The past year was very hard on the fertilizer makers, thanks to a couple of major issues. The breakup of Russian potash giant Uralkali and Belarus-based operator Belaruskali's sales partnership was probably the most publicized stumbling block. Uralkali broke the alliance by deciding to work alone and gain market share by dropping its selling prices. This unforeseen action sent fertilizer producer shares plunging worldwide, as investors feared an imminent price war.

Though a stunning development, Uralkali's decision only accelerated an already-festering industry problem -- overcapacity. Lulled by an exceptional operating environment in 2011, when crop-fertilizer demand flourished and pricing was abnormally strong, producers boosted production. This rise in industry capacity greatly increased product supply just as demand for crop nutrients began to moderate. A collapse in pricing and industry profits, amplified by anxiety over Uralkali 's intent, was the result.

PotashCorp, the world's largest crop-nutrients company, saw sales down 29% year over year in its latest quarter. Earnings were off a stunning 45% as a result of the weaker pricing. Mosaic, a leading phosphates producer, reported adjusted earnings dropped 36% compared to the prior year, with sales falling about 27%. CF Industries, the world's second largest maker of nitrogen fertilizer, posted adjusted earnings 38% lower year over year in its latest quarter as revenue sank 19% due to lower selling prices and buyers holding out for even further bargains.

Reorganizing the industry for long-term gain
Given the disappointing performance, it's not surprising that fertilizer producers have taken remedial action. Aimed at ensuring long-term profitability, Mosaic has been retrenching from its non-core business. It sold a salt-producing operation, closed a potash mine, and exited underperforming distribution businesses in South America. While cutting back in certain areas, the company is scaling up its commanding phosphates operation.

Attempting to gain a bigger share of the lucrative North American market, Mosaic agreed to purchase CF Industries' phosphate business for around $1.4 billion. The deal appears good for both companies. Mosaic gets to forego a costly planned manufacturing plant and also receives an attractive long-term supply contract as part of the purchase.

CF Industries, by jettisoning phosphates, can now focus on two main priorities. It wants to improve the profitability of its leading nitrogen business and return more cash to shareholders. Through improvements to its nitrogen operations, valuable long-term contracts like the one signed with Mosaic, and prudent use of additional debt, the company expects to generate higher cash flow, which will be available for larger dividend payouts or more share buybacks.

PotashCorp is taking a vigorous step toward reducing industry overcapacity by cutting its workforce by about 18%. Deciding the best way to enhance profits is by supporting product prices via a reduction in supply; the company is closing both a phosphate and chemical plant. The reorganization should help earnings in the long run. As fertilizer demand is likely to increase over time, thanks to a growing world population that needs to be fed, controlled production will keep prices elevated and support higher net income.

A possible reconciliation for short-term gain
The benefits provided from fertilizer-industry reorganization may be heightened by a possible Uralkali and Belaruskali reconciliation. Since the partnership dissolution wasn't really in anyone's interest, as seen in the 24% sales-price drop in a recent Uralkali-China potash deal, some sort of arrangement between the former partners seems to make sense.

A reunion may also fulfill political needs. Shortly after the split, Uralkali's CEO was detained in Belarus, apparently with the encouragement of the country's President Aleksandr Lukashenko, who was outraged at the Russian company's departure from the alliance. Lukashenko said a change in Uralkali's ownership would be necessary before any conciliatory talks could take place. Meanwhile, Russian President Vladimir Putin declared that the potash dispute needed to be resolved.

Significant changes in Uralkali's ownership and management did coincidentally take place. New participants bought out old owners, and Dmitry Osipov, deputy chairman of OAO Uralchem -- a company that held a sizable, newly acquired Uralkali stake -- was named CEO, replacing previous management. Interestingly, Uralchem is majority owned by a Belarus-born, Russia-domiciled billionaire. All the corporate maneuvering suggests a reemergence of the Russian-Belarus association might be likely -- an event that should inspire increased confidence in and higher share prices for all fertilizer stocks.

Final thoughts
The stock market is very cautious on fertilizer companies -- not surprising given the sector's recent travails. But the industry has taken steps to become leaner and more efficient, potentially supporting higher profitability in the long term. In addition, there are signs that the damaging split between Uralkali and Belaruskali may be mended, which could boost crop-nutrient stocks in the short term.

Investors may want to start considering fertilizer-company stocks now, while expectations are low, because share prices could grow quickly once Wall Street starts noticing the possibility of an industry rebound.

Where should you put your money in 2014?
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

 

Bob Chandler owns shares of CF Industries Holdings, PotashCorp, and The Mosaic Company. The Motley Fool owns shares of CF Industries Holdings and PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers