The decrease in value of such companies as Mosaic Company (MOS) and the Potash Corporation of Saskatchewan (POT) has recently made headlines in the financial news. Many investors have fled the agriculture sector, thus driving stock prices down even more. Based on my analysis of the sector, I believe now is the best time to buy shares of Potash. This article will explore and document the reasons why I believe Potash will be the best-performing stock out of the entire agricultural sector.
Based on recent news that the United States is exporting more wheat and corn than ever, there is going to be an increased demand for fertilizer for these crops. Coupled with Potash's nearly 25% drop in stock price, there is a strong case for buying shares of Potash. Investors should purchase the stock because it is has exposure to all three of the world's major types of fertilizers, which are urea, nitrogen and phosphate. The lull in world food production can only be temporary, however, as the world population is rising at an alarming rate. Rising population rates will inevitably create a domestic and worldwide demand to produce more food for growing populations. United States farmers had a record year in 2011, and still continue to produce at full capacity. This recent increase in farming means that farmers worldwide will create greater fertilizer demand. Moreover, because Potash is one of the six companies that dominate the world's fertilizer market, coupled with an increased world demand for fertilizer, Potash's stock has nowhere to go but up. Based on these reasons, I believe Potash is in an ideal position to increase productivity, which will in turn increase its stock price.
One of Potash's competitors is CVR Partners LP (UAN) (trading as UAN, which is also the brand name of its best-selling fertilizer) has a Market capitalization of $1.9 billion. Compared with Potash's market capitalization of nearly $40 billion, I would think CVR Partners LP has more room for growth based on its smaller market cap. However, when looking at the one-year estimates for both companies, my opinion to buy it becomes validated. CVR Partners' one-year target estimate is $25.50 while at the time of writing the stock's quote is $26.86, a projected $1.36 per share loss. This also takes into account CVR's preparations to increase production of its headline fertilizer product UAN this year. However, Potash's one-year target estimate is $55.94 while at the time of writing this stock's quote is $46.90, forecasting a $9.04 or nearly 20% gain. Based on this analysis alone, Potash is a much better performer than its competitor CVR Partners LP.
Another reason I believe Potash will do well is because of its sheer enormous presence in the fertilizer and commodities sectors. This is a huge company, possibly the largest of its kind in the world because it produces 20% of all potassium worldwide. It has a proven track record of providing solid gains for its investors even in light of near-term commodity and agricultural prices. Moreover, it has a P/E ratio of only 12. Compared with CVR Partners' P/E ratio of more than 18, Potash has a lot more room for growth. This further supports my opinion that Potash is a better performing agricultural sector than CVR Partners.
Even With Terra Nitrogen Company (TNH) increasing its year-to-year revenue by 42% in 2011, I still believe, based on historical performance and future conditions, that Potash is the best sector play. Terra specializes in Nitrogen-based fertilizers, which are cheaper to produce than its potassium-based competitors. This company offers a pretty stable investment, currently trading at $232 at the time of this writing. It has a 52-week range of $101.21-$242, a market cap of $4.3 billion, and a P/E ration of 15. However, comparing Potash's P/E ratio of 12, the stock's price pullback of nearly 25%, and Terra Nitrogen's huge stock gains, I believe based on these fundamentals, that Potash is posed for stratospheric stock gains. Moreover, comparing the two company's 52-week moving averages, Terra Nitrogen is less than 5% away from the top of its 52-week moving average. Yet, Potash's one-year target estimate is $55.94, and at the time of writing, this stock's quote is $46.90, forecasting a $9.04 or nearly 20% gain. Based on this analysis, I believe that my opinion on Potash as the best performing sector stock is correct, because Potash has more potential to see huge gains.
Even Compared with The Mosaic Company , Potash is a much better sector performer. This is primarily because Potash has much better fundamentals and future indicators. Based on analysts' one-year target estimate of $84.46, Mosaic's stock looks pretty appealing compared with its current stock price of $58.21 at the time of writing. However, its future price is misleading, because Mosaic is having issues with turning expected profits based on its free cash flow metrics. Its free cash flow is being eaten up by debt payments, taxes and capital investment. Since the company's books are reporting its earnings before such payments, the free cash flow is not a true reflection of its ability to make future gains.
Potash is the sector's best performing stock because it is has solid fundamentals, including exposure to all three of the world's major types of fertilizers - urea, nitrogen, and phosphate. Moreover, because Potash is one of the six companies that dominate the world's fertilizer market, coupled with an increased world demand for fertilizer, Potash's stock has nowhere to go but up.
Overall, because Potash has sound company fundamentals, a track record of proven profitability, and positive future indicators, I believe it is the best stock in the agriculture sector to purchase today.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.