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With the S&P 500 (NYSEARCA:SPY), a proxy for the market down, 17%-18% from its recent high of $137.18 in April 2011, most stocks’ earnings estimates for the rest of 2011 have been cut by analysts. A few haven’t. Fertilizer producers Agrium Inc., Mosaic Co., and Potash Corp. all beat and raised in their last reporting quarter. Agrium Inc. (NYSE:AGU) beat by $0.34 ($4.60 versus an expected $4.26). Mosaic (NYSE:MOS) beat by $0.07 ($1.45 versus an estimated $1.38). Potash (NYSE:POT) beat by $0.10 ($0.96 versus an estimated $0.86). As a result, all of their FY2011 average analysts’ EPS estimates are higher than they were 30 days ago. Is this unusual in a market down 17%-18%? Shouldn’t they have gone down on worsened economic expectations? Perhaps the answer lies in the World Crop Report details (see some below). Perhaps the answer lies in the opinions of commodities expert such as Dennis Gartman, who said Wed., “We have the Chinese coming to buy corn in size.” To back Mr. Gartman up current estimates say 45 Asian countries will grow by 7.8%+ in 2011 and by 7.7%+ in 2012. Countries with that high a GDP growth rate will demand more food.

The US debt rating was cut by S&P. The banking system in Europe has come under attack (for its possible failure). U.S. banks have been under attack. World GDP estimates were lowered by Morgan Stanley to 3.9% for 2011 and 3.8% in 2012 (from 4.2% and 4.5% respectively). After the market closed Friday Aug, 19, 2011, Goldman Sachs cut its U.S. GDP estimates for Q3 and Q4 2011 to 1.0% and 1.5% respectively. This could impact the markets today (Aug. 22). However, the GS cut is really more of the same after the Morgan Stanley downgrade of its World GDP estimates. The market will likely move Monday on other news coming from Europe during the weekend (or from the Fed in Jackson Hole during the week).

In contrast Abbie Cohen of Goldman Sachs seemed to think the market has already priced in more bad news than is actually going to occur. She stressed that she was not trying to predict the short-term movements of the market, but she did think prudent buying with a long-term view in mind was appropriate at this time. The above fertilizer companies are ones a long-term investor should think about. Plus Hewlett-Packard (NYSE:HPQ) accounted for fully one third of the DJIA’s fall on Friday Aug. 19, 2011. If you consider the extra downward psychological push HPQ gave the rest of the DJIA stocks, you may conclude HPQ’s contribution to the down move was probably much larger than 33%. You may decide it is about time for the DJIA to bounce.

The news from the latest World Crop Report (WASDE - 497 Aug. 11, 2011) shows very mixed results in amounts produced and overall supplies compared with last month. However, the price ranges forecast for grains are up overall. The 2011/2012 season average farm price forecast for wheat is projected at $7.00 to $8.20. This is up from last month’s projection of $6.60 to $8.00. The season average farm price for corn is now projected at $6.20 to $7.20. This is up $0.70 on each end of the range from last month. Soybean prices are projected at $12.50 to $14.50 per bushel. This is up $0.50 on both ends of the range. Soybean meal prices are projected at $355 to $385 per short ton. This is up $10 on both ends of the range. The farm price for all rice is unchanged from a month ago. In sum this data all means that farmers will be ever more anxious to maximize their crop yields. The higher prices mean they will likely have more money to spend on fertilizer. It means the raised earnings expectations of the above companies may be real even in the currently troubled world financial state. People do still need to eat.

In addition to grain prices going up, fertilizer prices have also been going up. First Canpotex, which markets potash for the above three companies, signed a contract with China for 2H2011 to sell a minimum of 500,000 tonnes to China with options to sell another 200,000 tonnes at $470/tonnes. This price (up $70/tonne from the previous contract) exceeded analysts’ expectations. Then Canpotex signed a contract with India to sell Indian buyers just under 700,000 tonnes of potash during Q4 2011 and Q1 2012. The Q4 volumes will be priced at $470/tonne, and the Q1 2012 volumes will be priced at $530/tonne. This virtually ensures a price hike in the next Chinese contract (for 1H 2012).

Aside from the above positive macroeconomic factors, each specific stock’s financial fundamental data supports a good growth scenario. The data are in the table below. The data are from TDameritrade and Yahoo Finance. 

Stock

AGU

MOS

POT

Price

$76.64

$63.02

$50.65

1 yr Analysts’ Target price

$106.17

$84.46

$68.90

Predicted % Gain

38.5%

34.0%

36.0%

PE

11.14

11.21

18.45

FPE

8.44

N/A

11.64

Avg. Analysts’ Opinion

2.3

2.2

2.1

Miss Or Beat Amount For Last Quarter

+$0.34

+$0.07

+$0.10

EPS % Growth Estimate for 2011

94.00%

N/A

84.30%

EPS % Growth Estimate for 2012

1.10%

N/A

15.70%

5 yr. EPS Growth Estimate per annum

5.00%

8.00%

12.50%

Market Cap

$12.11B

$28.14B

$43.35B

Enterprise Value

$13.80B

$25.07B

$47.76B

Beta

1.66

1.35

1.10

Total Cash per share (mrq)

$6.12

$8.75

$0.48

Price/Book

1.98

2.42

5.52

Price/Cash Flow

8.83

9.49

14.91

Short Interest as a % of Float

0.71%

2.34%

1.13%

Total Debt/Total Capital (mrq)

30.25%

6.67%

38.03%

Quick Ratio (mrq)

1.27

2.81

0.70

Interest Coverage (mrq)

1,013.0

--

--

Return on Equity (ttm)

20.31%

--

33.60%

EPS Growth (mrq)

39.46%

63.57%

82.36%

EPS Growth (ttm)

94.62%

203.91%

75.65%

Revenue Growth (mrq)

39.88%

53.76%

61.80%

Revenue Growth (ttm)

41.21%

47.03%

48.00%

Annual Dividend Rate

$0.11

$0.20

$0.28

Gross Profit Margin (ttm)

26.85%

31.41%

45.98%

Operating Profit Margin (ttm)

11.615

26.81%

43.60%

Net Profit Margin (ttm)

8.28%

25.34%

30.61%

The above companies all look like good long-term buys. After the Canpotex contract with India, it looks increasingly like the current estimates will go up rather than down. This means these companies will do even better than analysts now predict. Potash is in relatively short supply currently. That doesn’t seem likely to change in the next couple of years. These companies should all do well. CF Industries (NYSE:CF), which is an excellent non-potash, fertilizer company, will likely come along for the ride.

Let’s look at the charts for a technical view - (click charts to enlarge).

The two year chart of AGU is below:



The two year chart of MOS is below:



The two year chart of POT is below:



Each of these charts shows its stock to be near oversold levels. They are all set to rebound upward. AGU and POT had strong uptrends going. They may be able to resume their uptrends soon. MOS had a less strong uptrend that has turned down with the downturn in the market. Much of this less strong performance has to do with the Cargill divestiture. The selling associated with this is mostly done. There may be one more bout in a few months, but I would expect MOS to resume its upward trend with relatively good strength. It is not issuing new stock. The formerly non-traded Cargill owned stocks are just going into circulation. MOS is involved in a lawsuit about a contract to supply Potash Corp. with 1,000,000 tonnes of potash essentially at cost. MOS believes it has completed all the obligations of the contract. POT naturally wants to keep receiving the potash, which is selling for far more than cost currently. My feeling is that MOS should win. However, we may have to wait until March or so to find out as the case goes to trial in Jan. 2012. The company that wins should win in stock price too. The company that loses will lose stock price. This probably makes AGU and CF even better buys than they appear by the numbers. With the odds on MOS to win, it is probably a better investment than POT in the near term.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MOS, AGU over the next 72 hours.

Source: Fertilizer Companies Look Set To Bounce