No True Reason To Sell Your Fertilizer Stocks

Includes: AGU, CF, CVI, POT, RNF, TNH, UAN
by: Jonathan Wolfe

Fertilizer stocks have taken a big ride down the rollercoaster over the past week with Charles Neivert, managing director at Dahlman Rose & Co., downgraded CF Industries Holdings Inc. (NYSE:CF) to "Sell" from "Hold." CVR Partners LP (NYSE:UAN) was lowered to "Sell" from "Hold" and Rentech Nitrogen Partners LP (NYSE:RNF) was revised to "Hold" from "Buy."

Charles Neivert is an "expert" in fertilizer, and in nearly every article I have read that he has had input in, his record shows he is very bearish on them. An article from August 2010 shows Neivert as being bearish about fertilizer use for 2011. However, CF Industries stock has actually doubled since that time, and earnings for Potash Corporation of Saskatchewan Inc. (NYSE:POT) have dramatically increased every year since 2009. What also surprises me is that Dahlman Rose & Co.'s Neivert has downgraded CF Industries to sell, but not a company that it owns 75% of, Terra Nitrogen Company LP. (NYSE:TNH).

Decreased prices for Nitrogen fertilizers for 2013 and beyond, and lower earnings is not new news here. All of the larger fertilizer stocks: Rentech Nitrogen Partners , CVR Partners LP , CF Industries Holdings Inc , Agrium Inc (NYSE:AGU), Terra Nitrogen Company LP (TNH), to name the ones I have been following, have been projecting slightly lower EPS numbers for 2013 for some time now.

I wrote in a previous article when I was bullish about Rentech Nitrogen Partners at $23 a share about the record high corn estimates of 94.2 million acres. The estimate now is 95.9 million acres. What does this mean to me? Higher earnings for the nitrogen producers in 2012, and that was confirmed by Rentech Nitrogen Partners on Friday in their first quarter report (read below).

July corn is down to $5.96 a bushel and just over $5 for December corn. This is still much higher than the bearish reports of $4 a bushel. The other interesting numbers on this report was the projected U.S. corn production is expected to rise this year to a record of 14.79 billion bushels, from 12.358 billion bushels last year, as farmers boost yields to what could be a record 166 bushels an acre, the government said. Yields last year were 147.2 bushels an acre. If yields end up being about 150 bushels per acre instead of 166, the production would rise only to 13.3 billion bushels, which would not be a record output.

Rentech Nitrogen Partners and Terra Nitrogen Partners will continue to reap low natural gas prices. Too much supply and a glut in storage will keep the prices low. Independent trader John Woods notes that $2.525/MMBtu marks the source of strong technical resistance. Another independent source states that the price of Natural Gas for 2012 will average $2.70/MMBtu. These numbers alone will produce big earnings for Rentech Nitrogen Partners and Terra Nitrogen Partners for 2012, and I believe for at least a couple years beyond. Also on Friday May 11th, Rentech Nitrogen Partners announced first-quarter results and it has blown the top off of my projection in my last article of $2.50 a share and it predicts a distribution in the range of $2.86 per share. At $23 a share, this is well above a 12% yield.

On May 1st, CVR Partners announced first-quarter results, and even though it missed its EPS numbers, it raised its 2012 distribution estimates from $1.50-$1.75 to $1.65-1.85. It has also announced distribution estimates for the next many years, and predicts steady distributions of just under $2 a share per year.

CF Industries is poised to make $24.97 a share in 2012; analysts have boosted the EPS by $3 a share over the last 90 days. 2013 EPS looks solid as well, at $21.39. This puts a forward PE for CF Industries at around 7! The reason I have not covered a stock like CF Industries in the past, is due to my preference for dividend-paying stocks. CF Industries pays a very small dividend of $1.60 per share, which is less than 1%.

One thing to watch is the price ratio between corn and soybeans. When the ratio is less than 2.5, meaning the price of soybeans is less than 2.5 greater than corn, it is more profitable to grow corn. Over 2.5, and the profit shifts to soybeans. Of course, if more soybeans are planted, less Nitrogen is used on the soybean crop compared with corn, and this will hurt the bottom line for Nitrogen producers. It appears that soybean production is down in 2012, from 75 million acres in 2011, to 73.9 acres in 2012. With prices of both soybeans and corn staying above 5-year averages, we will continue to see unused acres being planted, which will require at least some application of fertilizer.

Here are the bear arguments that I have for CVR Partners , Rentech Nitrogen Partners and Terra Nitrogen Company.

1. CVR Partners and Rentech Nitrogen Partners are companies with one plant only and are planning expansions at their plants. If the plant fails (fire, lengthy outage, etc), the company is dead in the water. The other issue here is if they both start producing more product, this could drive the price down. This could also add shipping costs to these companies, which currently operate mostly without them.

2. For CVR Partners , the possible split up of the company now that Carl is running CVR Energy (NYSE:CVI). If they don't keep their partnership, and CVR Partners does not get its pet coke from CVR Energy, that could hurt its fuel costs.

3. For Rentech Nitrogen Partners, if there is a spike in Natural Gas prices. This would also hurt Terra Nitrogen Company . Here in Pennsylvania, they find gas everywhere. Until there is LNG exports here in the U.S. (2015 probably at the earliest), I don't see the price coming up much.

Conclusion: I believe more soybeans will be planted in 2013. This could help Potash stocks such as Potash Corporation of Saskatchewan Inc. There will also be a large amount of corn planted in 2013; I would estimate over 90 million acres, so there will still be a large demand for Nitrogen fertilizers. We have not discussed fertilizer application onto winter wheat, which will be a whole other subject. Even with record plantings, we have no clue on any possible weather disasters ahead of us, either in this country or overseas. As 2013 growing season comes upon us, even if corn prices are somewhat depressed - in the $4 a bushel range, it will still be more profitable to plant the acres than leave them unplanted. I know I am just one person with some information and an opinion on this sector, but does that make me different from Charles Neivert? He is a bear, and I'm a bull on these stocks. Read the information on these stocks and make the decision for yourself.

Disclosure: I am long UAN, RNF.