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As seen on the news, the Mississippi River has overflowed its banks. Almost non-stop rain has swollen the river to epic size. Memphis barely survived, while the land south of there is experiencing serious trouble. We will see exactly how hard the lands along the southern Mississippi are hit as the next few days and weeks unfold.

The damage to crops will likely be in the billions of dollars, as the area flooded will be in the millions of acres. Soon the entire area south of the opened Morganza Spillway will be flooded. That’s a large chunk of the farmland in Louisiana. Meanwhile, Arkansas has more than 1500 square miles flooded; they blasted a levee to flood Missouri farmland to avert the flooding of Cairo, Illinois; and the state of Mississippi has considerable flooding. Estimates are for total flooding there to be more than 2100 square miles.

In fact, the Mississippi River is backing up the Yazoo River, and it is flooding too. I don’t know the overall totals yet, but this flood is being compared to the epic flood of 1927; in other words, it’s a once in a century phenomenon. The crop damage, as already noted, will be extensive.

Eventually the floodwaters will subside. The farmlands may need some work, but they will go back to being farmlands and will need to be re-planted. For a shortened season, they will need good seed and good fertilizer. In many cases the river will have washed away soil nutrients. Some of the companies that may benefit directly are Potash (NYSE:POT), Mosaic (NYSE:MOS), Agrium (NYSE:AGU), CF, and Intrepid Potash (NYSE:IPI). They should see a nice up tick in sales from this disaster. In addition they may get secondary business from farmers elsewhere in the US and the world who will be trying to take advantage of the now larger shortage in grains. Since the world’s grain stores were already short due to the many disasters last year, the supply will be still shorter.

Another factor in all of this is that the flooding will cost economies along the Mississippi huge amounts of money each day. When the port of New Orleans closed down due to an oil spill in 2008, the estimated cost of the shutdown was $275M/day. This is just one of the instances of economic impact. The flood’s economic impact may have negative effects on the US equities markets. With this in mind, one wants to be defensive. The larger cap, multi-national companies will be more stable. Still, all of the fertilizer companies are likely to benefit. The table below contains a lot of the relevant fundamental information for the above mentioned stocks. The data are from Yahoo Finance and TDameritrade.

Stock

POT

MOS

AGU

CF

IPI

Price

$51.58

$67.35

$80.43

$133.23

$28.94

1yr. Analysts’ Price Target

$65.09

$85.75

$104.22

$161.31

$32/54

PE

22.23

13.34

14.31

14.98

35.29

FPE

13.33

12.18

10.30

10.17

15.39

Avg. Analysts’ Recommendation

2.2

2.9

2.2

2.2

3.4

5yr. EPS Growth Estimate per annum

15.00%

20.60%

16.00%

10.40%

16.00%

Price/Book

6.14

2.74

2.36

2.19

2.76

Price/Cash Flow

17.56

11.16

11.6

7.82

23.78

Beta

0.97

1.20

1.45

0.91

1.25

Cash per Share (mrq)

$0.55

$7.51

$2.83

$15.91

$1.44

Short Interest as a % of Float

0.57%

1.80%

0.37%

3.30%

11.50%

Market Cap

$44.09B

$30.07B

$12.71B

$9.55B

$2.18B

Enterprise Value

$49.02B

$27.61B

$14.92B

$10.03B

$2.07B

Total Debt/Total Capital (mrq)

42.93%

7.45%

33.10%

25/25%

0.00%

Quick Ratio (mrq)

0.59

2.97

0.8

1.02

3.71

Interest Coverage (mrq)

327.33

24.16

12.53

12.98

--

Return on Equity (ttm)

29.34%

23.26%

18.29%

20.93%

8.18%

EPS Growth (mrq)

68.97%

143.04%

8098.35%

4420.37%

138.30%

EPS Growth (ttm)

83.71%

290.70%

110.77%

46.89%

44.92%

Revenue Growth (mrq)

28.59%

27.85%

59.85%

133.68%

-2.22%

Revenue Growth (ttm)

47.41%

37.67%

26.58%

90.79%

11.45%

Annual Dividend Rate

$0.28

$0.20

$0.11

$0.40

--

Gross Profit Margin (ttm)

43.49%

31.49%

25.82%

33.98%

33.74%

Net Profit Margin (ttm)

29.35%

25.26%

7.68%

15.79%

17.29%

Insider Transactions in the last 6 months

N/A

(158,797)

N/A

(190,800)

(2,233,830)

Net Shares Purchased by Institutions in last 6 months

N/A

(15,295,000)

N/A

(15,364,200)

(7,406,260)

I think these all look interesting. The high short interest, low return on equity, and high multiple of IPI is enough to make me prefer the other companies. There is no question both insiders and institutions have been selling the above stocks. My thinking is that this has been a part of a massive commodities sell off. Some may be preparing for the end of QE2. The overall future prospects of the companies look good. The subsiding of the Mississippi flood may trigger the end of the sell off.

Before the flood, the World Agricultural Supply and Demand Estimates from the USDA (May 11) already called for large price increases for grains from the 2010/2011 year to the 2011/2012 year. The wheat price for the 2011/2012 is projected to be $6.80-8.20 per bushel compared with $5.65 for the 2010/2011 year. Corn prices are projected to be $5.50-6.50 per bushel compared to $5.10-5.40 per bushel in the 2010/2011 year. Soybean meal prices are forecast to be $350-380 per short ton compared to $350 per ton. Soybean oil prices are projected at $0.56-0.60 per pound compared with $0.535. You get the idea.

In addition, the Mississippi River flood may be just the beginning of the disasters. The global warming trend seems to be leading to more severe weather patterns in general. The monsoon season in India, Pakistan, and China was truly disastrous last year. The early signs indicate that this year will be bad too. This would put further pressure on China and India to make the most of what growing seasons they get (after flooding, etc.). Floods tend to wash nutrients away. This means these countries will want to buy fertilizers. Some of these will come from POT, MOS, AGU, and CF. The long term outlook for these companies is excellent.

A look at the charts may give a better idea of when to get in. The MOO ETF chart can be used as a proxy for the general fertilizer industry.

The one-year MOO chart:

[Click all to enlarge]

MOO is oversold. It looks like it may be about to rebound. The Money Flow Index looks to be heading upward.

The one-year POT chart:

POT is in a downtrend. It is oversold, but it may sell off further.

The one-year MOS chart:

MOS is in a fairly strong downtrend. It is oversold, but it has yet to show signs of a rebound.

The one-year AGU chart:

AGU is not completely oversold. It looks like it may be about to rebound upward.

The one-year CF chart:

CF is nearly oversold. It appears that it will sell off further.

In sum, the charts still look mostly negative. However, these stocks could start to rebound at any time. The southern Mississippi is supposed to crest on Tuesday. However, it is supposed to remain high for weeks. This means continued flooding and damage. These stocks may start to rebound upward before those weeks end. It is hard to say exactly when. However, they have already retreated more than 20%. It is probably appropriate to begin averaging in for a long term hold position. I think I have pointed to sufficient fundamental evidence that should push the profitability and the prices of these stocks upward over the longer term. It will probably turn out to be best to buy before the floodwaters subside substatntially.

A final factor is the USD Index. It appears to be in an uptrend. If this persists, it may cause a continued sell off in commodities as the USD rises, since most commodities are denominated in USDs. Further a rising USD could cause an unwind of the USD carry trade. This would likely cause a sell off of US equities in general. The current USD Index rally looks like it may persist to a level of 77-78 or 79-81. The EU credit crisis is a worry. Plus the negotiations about the debt ceiling upset the markets. The hard line being taken by Republicans tends to make commodities go down. It is anti-inflationary.

Source: Fertilizer Companies Could Benefit From Mississippi Flood