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Fertilizer stocks have been on a rough ride in recent months. At the end of July, they were on an upswing, following news that hedge fund manager Daniel Loeb took a stake in CF Industries (NYSE:CF). A few days later, they were sharply lower, following the news that the marketing cartel that helps the industry maintain high prices for fertilizer products is breaking down; and global fertilizer prices and revenues are declining--Potash and CF industries have already seen a double-digit revenue decline (see table).

Potash (NYSE:POT) and Mosaic (NYSE:MOS) stocks were particularly hit, losing close to 19 percent of their market value in one week's time, while Terra Nitrogen (NYSE:TNH), and CF Industries suffered smaller losses.

Company

Dividend Yield (%)

Forward P/E

Operating Margins (%)

Qtrly Revenue Growth (yoy)

Qtrly Earnings Growth (yoy)

Potash Corporation

4.40

14.16

38.33

-12.10%

23.20%

The Mosaic Company

2.40

--

22.85

-4.5

-4.20

Terra Nitrogen

7.80

--

74.24

13.80

31.90

CF Industries

0.70

10.33

48.97

-12.50

10.30

Now the dust is settling, Barron's market commentator Vito J. Racanelli thinks that the correction in the stocks is overdone. "So far, the Russians and Belarusians are still not cooperating, and spot potash trades at about $380; contract prices are probably around $30-$40 a ton lower. Soft demand growth around the world hasn't helped. Nevertheless, since our original piece ran, Potash's stock is up about 10%, to $32.14.

We couldn't agree more, for four reasons: First, a few major players, which enjoy hefty profit margins, dominate the sector. CF Industries, for instance, enjoys an operating margin of 48.97 percent, while Terra Nitrogen is enjoying an operating margin of 74.24 percent; and pays a hefty dividend of 7.51 percent. Second, the sector is subject to economies of scale and strict environmental requirements that restrict the entry of new competitors. This means that whatever price pressures follow the breaking of the marketing cartel will be limited. Third, cartels undergo periods of crisis that are eventually resolved as soon as overall demand conditions improve. Fourth, Potash and Terra pay a good dividend payout, which makes them an attractive investment in a low-interest environment.

The bottom line: The breaking of the marketing cartel may limit the pricing power in the fertilizer industry making a dent in the revenues and profits of fertilizer producers, but it won't eliminate the market power of major players. That's why the sell-off is a buying opportunity for value investors.

Source: 4 Reasons To Pick Up 4 Fallen Angels In The Fertilizer Industry