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One can correctly argue that fertilizer stocks have run out of steam. Goldman Sachs, on the one hand, is bearish, while Citigroup, Merrill Lynch and Morgan Stanley are positive on the sector going forward. I tend to take the side of the latter. Though I have a neutral rating for the time being, I personally think that this sector, which includes agriculture commodities, will outperform the most once we are out of this recession. Morgan Stanley predicted some of the fertilizer stocks to peak in 2011, the simple logic being that no matter, what the world has to eat; growing population; decrease in agricultural land; and pollution.
Fertilizers fall into three different categories: nitrogen, phosphate and potash. Prices of these three commodities have fallen significantly off the cliff. The worst decline has been in the case of nitrogen, while less in case of phosphate and significantly less for potash (due to monopoly). TRA, which is PURELY a nitrogen play, has been hit hard. The company has reduced and idled a number of its operations due to recession. TNH, which is a subsidiary of TRA, has held up relatively well, partially because of its hefty dividend of 11.80 per shares.
AGU deals in all three of these areas. However, it has a record level of inventory at 2.5 bn (almost 50% of current assets), and with demand falling off due to the credit crunch, it may have to take mark-down losses with inventory prices going down.
MOS and POT are my favorites in the area with strong balance sheets. They supply nitrogen, phosphate and potash fertilizers worldwide and are safe on the inventory side unlike AGU. POT controls 22% of the potash supply. Along with MOS and AGU, they have a monopoly in potash, whose prices have held up relatively well so far. This monopoly may not continue to exist since mining giants like RTP and BHP are entering this area. Other small competitors in this area include IPI.
Another name that strikes me is little known CF Industries (CF). It has the highest room for future growth. CF deals mainly in nitrogen and phosphate based fertilizers, both in manufacturing and retail distribution. Apart from a strong balance sheet and the lowest P/E among all, another aspect that surprises me is that the company has business ONLY in North America. Almost 90% of its revenue and profits so far come from the US. The company is building scale and operations to expand outside of the US. It hired Bert A. Frost from ADM (one of the world's largest food processing company) as VP to extend operations outside of the us US (see here). The company is in the process of finalizing new plants in Peru.
Disclosure: Though I added new positions in POT, MOS, CF, AGU sometime November 2008 after closing my old positions in Sept 2008, I have closed my new positions in AGU and MOS. I continue to long POT, CF.
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This article has 4 comments:
From: ProactiveTrader <proactivetrader@ya... Sent: Sat 01/03/09 11:23 PM
Subject: MOS earnings, retest 34-31, at 36.86 Type: Attachments
Attachments: MOS1109.JPG 38.6 kb MOS1012009.doc 82.5 kb
Alert: The users email-address has been added to the addressbook
MOS, Mosaic, 36.86, up 2.26 on Friday. Earnings due Monday, after the close. Technical indicators are expecting good news. (45 calls at 49 cents and 30 puts at 63 cents for a total cost of $1.12 to play before earnings.) (Or the 35 calls at 3.84 and the 35 puts at 1.85 for 5.69 cost to breakeven. Price would have to move up to 42 or down to 32 after earnings in this hedge to breakeven.)
The attachments show a 5 Star stock contrasted with a “capitulation selling” chart. The Flow of Capital chart (flowofcapital.com) shows negative signals but improving with some green signals indicating active bottom fishing. Good earnings news will bring in more bottom fishing and propel price up to 40 resistance. Bad news will be a negative surprise and target price back down to test the bottom, below 30. Meeting expectations will target a test of 34.
The attached 5 Star Rating (stockpickerusa.com) is a result of calculated, long-term value and forecasts. Capitulation selling took price down to 22 after being as high as 163. This sets up the opportunity to be pro-active after the earnings announcement. Price has already moved up 68% from the bottom, anticipating good earnings news and the fact that all the major selling is done. (See Flow of Capital, FC, turning up and the spike in Demand, DS indications of pre-mature bottom fishing.)
After earnings are announced, price will target 40 resistance or 30 support. Recent analyst downgrades as well as the move up in anticipation of good earnings point to the probability of selling on the news and a retracement to test support at 34 and 31 on the 5-day chart.
Only 90 days ago analysts were looking for 2.24 in earnings, but now they are expecting only 1.41 on Monday. Next qtr. earnings estimates have dropped from 2.83 to 1.13, getting worse rather than better. Earnings reported will be a reality check that will likely retrace part of that 68% move up from the bottom. Bottom fishers may have had their fill and wait for lower prices as indicated by the Demand spike on the attached chart.
Proactively there is an opportunity to participate after earnings are announced and as price heads for known support (or resistance) levels .
Do not own yet.