3 Chemical and Fertilizer Stocks Ready to Move

Chemical and mining companies offer one way to invest in the commodities that comprise fertilizer ingredients, especially nitrogen and potash. As the commodity price rises, these stocks tend to follow suit. Plus, greater production also boosts these companies' shares, giving you an inflation hedge and a growing company.

Over at CAPS, mining stocks have been especially popular with our more than 165,000 members. Here are three highly rated candidates for you to consider, along with a few relevant thoughts from people investing in them:

Company

ROE (TTM)

Revenue Growth, 5-Yr. CAGR

Income Growth, 5-Yr. CAGR

Recent Price

CAPS Rating (out of 5)

Chemical & Mining Co. of Chile (NYSE: SQM  )

20.6%

12.6%

30.0%

$37.32

*****

Terra Nitrogen (NYSE: TNH  )

74.4%

2.0%

21.4%

$73.32

****

PotashCorp (NYSE: POT  )

19.0%

7.2%

24.4%

$97.65

****

Source: CAPS, company filings, and Capital IQ, a division of Standard & Poor's. TTM = trailing-12-month. CAGR = compound annual growth rate.

Sociedad Quimica y Minera is the Spanish name for this Chilean producer of lithium and fertilizer. In its recently reported first-quarter results, Chemical & Mining's CEO Patricio Contesse said, "We observed positive signs of recovery in all of our business lines, with higher volumes in each business segment in the first quarter of the year compared to first quarter of 2009." If that trend holds true, this company could be poised for a big turnaround. As the world's largest lithium producer, it will play an important role in the growth of lithium batteries, a point mentioned several times by different CAPS members.

Terra Nitrogen's return on equity has been on fire thanks to a large jump in net margin over the last few years, which was driven by the company's ability to raise prices. Ammonia and urea ammonium nitrate (UAN) are the two primary products the company sells.

Year

ROE

Net margin

Price increase

2006

30.8%

10.9%

N/A

2007

110.7%

32.3%

Ammonia 10%
UAN 45%

2008

208.5%

46.8%

Ammonia 62%
UAN 47%

2009

83.9%

28.4%

Ammonia (59%)
UAN (61%)

Source: Capital IQ, a division of Standard & Poor's, and company press releases.

Strong pricing power indicates a wide moat, and Terra Nitrogen certainly seems to have one. It started raising prices even before the cost of natural gas, the largest input in its manufacturing, began to climb sharply in 2008. Of course, as natural gas became less expensive in 2009, and the global economic slowdown moved in, TN couldn't keep those elevated prices in place.

PotashCorp provides about 20% of the global capacity of potash, which provides potassium in crop nutrients. And as my fellow Fool Matt Koppenheffer recently pointed out, it's great to be one of the industry’s leaders; the company boasts of "fewer producers, less government control and higher barriers to entry." Analysts are expecting earnings to more than double from their 2009 level by next year. That might not happen as quickly as they hope, however, since prices for potash are expected to remain low for a while. But for investors with a longer view, buying shares after PotashCorp bounced hard off its 52-week low could turn out to be a smart move.

Shares of Intrepid Potash (NYSE: IPI  ) and Mosaic (NYSE: MOS  ) also hit 52-week lows late last month, which means all three might be worth looking at. Still, PotashCorp's ROE is much higher than its rivals', making me think it's the better potential investment.

You'll find more commentary on these and other fertilizer companies over on CAPS. Come and join your fellow investors for some stock talk today.

Jim Mueller does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


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