Phosphate Holdings: An Undiscovered Agricultural Gem

Following in the train of rising prices for virtually every agricultural commodity, fertilizer prices have continued to climb. Diammonium phosphate, potash, urea, sulfur and so on have all gone up.

Take diammonium phosphate [DAP], for example. In the first quarter of last year, prices averaged some $250 a ton. In the first quarter of this year, prices have gone as high as $1200 a ton. Companies that sell these products have seen their share prices rise alongside their products. Most of these will be well known to investors.

So, if one wants to invest in the fertilizer sector as a proxy for agriculture, where does one go? Potash (POT), Terra (TRA), Mosaic (MOS): all are at high prices and, while they may continue upward, they no longer look much like bargains.

Phosphate Holdings (PHOS.PK) is the sole owner of Mississippi Phosphates, a producer of diammonium phosphate. Earnings have been on a tear; results from continuing operations for the first quarter of 2008 were $8.9 million, as compared to $3.6 million for first quarter 2007.

Management is guiding to a second quarter net income of $38 to $44 million on EBITDA of $61 to $72 million. On fully-diluted 8.2 million shares out, and a current price of $42 per share, and assuming that the company continues its second quarter earnings for the foreseeable future, PHOS goes for a forward PE of about 2.

Why so cheap? One reason is that it's flying below the radar, trading on the pink sheets, with no analyst coverage. That's about to change. Management has indicated that it will seek SEC registration as well as an exchange listing.

Another possible reason for the cheap stock is that PHOS has no source of phosphates of its own, but must buy it from Office Cherifien des Phosphates, the Moroccan state phosphate monopoly. However, Phosphate Holdings has done business with them for years and sees no reason why the relationship will not continue. Also, Morocco is a relatively pro-Western state, whose king keeps a lid on things internally. While the price of phosphate rock will undoubtedly rise, supplies ought to be available. This is also the stock's main risk.

So, what it worth? Using comparable valuations of other publicly-traded fertilizer companies, such as TRA, MOS, or POT, shares of PHOS could be worth over $200, a five-fold increase from where they are today.

Fully-audited financial reports as well as management discussion are available at the company's website.

Disclosure: Long PHOS

Comments

[fxtrader07:]

if they have no phospates and act merely as a middleman - why shouldn they ever spot such an increase in their stock price? long business relationship or not - when it comes to lots of cold hard cash the guys in Marocco have zero reason to subsidise this company. So that spectacular price increase in phosphate will almost certainly be reflected in any future price contract, meaning the company will pay a lot more for it than in the past.
and if they buy high but prices subsequently tank, it might be holding the bag.
as i see it, buy those who own the real stuff - not those who just resell it

gl anyway

2008 May 23 05:18 AM

[karu46:]

Another pure play - PHOSCAN CHEMICAL (TSX venture exchange: FOS)

2008 May 23 10:53 AM

[sliman:]

I have to agree. Seems a bit risky. Their profit will be the spread between wholesale and retail. Like the oil refiners.

2008 May 23 11:00 AM

[maher:]

Fertilizer craze is over. The narrative on Ags is changing before our very eyes. Count on it.

2008 May 23 02:17 PM

[bds231:]

I'm confused by two passages in this post:

Phosphate Holdings (PHOS.PK) is the sole owner of Mississippi Phosphates, a producer of diammonium phosphate.

and

Another possible reason for the cheap stock is that PHOS has no source of phosphates of its own, but must buy it from Office Cherifien des Phosphates, the Moroccan state phosphate monopoly.

These statements seem contradictory, or do I just not understand what the difference between "diammonium phosphate" and "phosphates?" What am I missing?

2008 May 25 02:01 AM

[Jake2:]

Why would anyone want to buy the stock of a little known company that gets its supply of a questionable product from a unknown government agency in a middle eastern county (where the king "keeps a lid on things") and supply is questionable at best? Talk about "under the radar!" What about "under the sheets," or "under the table?" Sounds like gobbly gook to me.

2008 May 25 03:06 PM

[Galahad:]

They have no phosphate of their own. Phoscan in Ontario, Canada has plenty in their new Martison Plant. This Junior Mining Stock has a price advantage over all other U.S. sources due to their position being close to the Midwest.

2008 Sep 18 10:31 PM