The 4 Horsemen Of Fertilizer, And A 5th For Good Measure

Includes: AGU, CF, MOS, PAGG, POT, TNH
by: Marc Courtenay

"Do you know the difference between political promises and manure? One is fresh, warm and steamy, and the other's a fertilizer". Attributed to Will Rogers (November 4, 1879 - August 15, 1935), who was an American cowboy, vaudeville performer, humorist, social commentator and motion picture star.

Enough fertilizer jokes for now. Center stage will continue to be the comments that Fed Chairman Ben Bernanke made Friday. They were meant to keep the investment markets hopeful, or as one commentator put it "high on hope-ium". Here are a couple of highlights of his speech:

...because of various unusual headwinds slowing the recovery, the economy needs more policy support than usual at this stage of the cycle; and the need to compensate for limits to policy accommodation resulting from the lower bound on rates. ...

Unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time,..

These are the carefully chosen words that let us know what he wants all investors and traders to be focused on. Unemployment stands at 8.3 percent, which Dr. Bernanke has stated is 2 percentage points higher than where the Fed would prefer it.

The first trading day after Labor Day has historically been an up day for the markets (13 of the last 17). Yet as many of us know September has been the worst performing month of the year for the major stock averages, down 37 of the last 61 years.

This first week of this month the focus will most likely be on Thursday's European Central Bank (ECB) meeting and whether they make supportive comments about plans to help the financial mess in Europe.

Thursday's data will also include weekly jobless claims and the ISM's non-manufacturing services index number. The "hot-button" report that day will most likely be Automatic Data Processing's (NASDAQ:ADP) employment report which sets the stage for Friday's payroll data.

Yes, Friday will bring us the Labor Department's non-farm payroll numbers and the official, current version of the government's unemployment rate. Dr. Ben already seems to think it won't be an encouraging report, and that's probably why he made sure to mention the unemployment rate in the text of his Jackson Hole speech.

Now, The Four Horsemen of Fertilizer Plus One

Let's first mention them in alphabetical order: Agrium (NYSE:AGU) CF Industries (NYSE:CF), Mosiac Co. (NYSE:MOS), Potash Corp. (NYSE:POT), and Terra Nitrogen (NYSE:TNH).

Why should we be focusing on fertilizer stocks at this point? Mainly because there are 7 billion humans on this planet and they all want to be well-nourished (although sadly more than 14% are malnourished).

Drought and adverse weather patterns have contributed to lower food production during much of 2012. This will put pressure on the commercial agriculture industry to produce a greater amount in 2013.

You can learn more about World Hunger and the growing need for increased food production by clicking here. The World Bank reported recently that worldwide food prices jumped 10% in the month of July.

There's been numerous reports and studies over the past 4 years that suggest at the very least that fertilizers and fertilizer chemicals are in short supply. Web sites like the Delta Farm Press give a good oversight.

When it comes to which publicly-traded agriculturally focused fertilizer companies to buy, the most popular companies (based on market cap and analysts coverage) at the moment are AGU, MOS and POT. Wall Street has been "voting" with their wallets over the past two years and Agrium is clearly the best-performing "winner".

Chart forAgrium Inc. (<a href=

There are many reasons for Agrium's outperformance including its year-over-year most recent quarter's 20% earnings growth. Its 1.18 PEG ratio (5-year expected) indicates that it is selling in line with its rate of earnings growth, so the share price isn't overvalued.

Now let's look at the Return-on-Equity (ROE) of the five fertilizer stocks. This is an important metric for determining what is the rate of return that shareholders are receiving for their equity ownership.

Another way of defining ROE is that it measures how much the shareholders earned for their investment in the company. Let's go down the alphabetical five and see how their ROE did in the trailing twelve months: Left column is company symbol and right column the ROE:

AGU 24.3%
CF 36.83%
MOS 16.32%
POT 30.32%
TNH 203.10%

And the winner is clearly TNH which engages in the production and sale of nitrogen fertilizer products. It primarily offers anhydrous ammonia and urea ammonium nitrate solutions.

The company was founded in 1991 and is based in Deerfield, Illinois, and operates as a subsidiary of a bigger holding company. When you look at the website associated with Terra Nitrogen you're in for a surprise.

It appears that TNH is a Master Limited Partnership traded on the New York Stock Exchange yet is a subsidiary of CF Industries. The assets of TNH consist primarily of a nitrogen manufacturing facility in Verdigris, Oklahoma. Terra Nitrogen GP Inc. serves as the general partner of the company.

TNH has the capacity to produce annually 1.9 million tons (32% nitrogen basis) of urea ammonium nitrate solutions (UAN) and 1.1 million tons of ammonia, the basic ingredient for most nitrogen fertilizer and many industrial products.

So as far as I could determine if you own shares of CF you may be getting some of the benefits from TNH but not much. If you want to focus your investing in its ammonia-based fertilizer business you have to own shares of TNH directly.

I recommend you carefully peruse the website of CF industries and TNH and draw your own conclusions. A thorough examination may change your mind on which fertilizer company you want to own.

For those who simply want exposure to the agricultural fertilizer sector, you may want to consider the PowerShares Global Agriculture ETF (NASDAQ:PAGG). Don't be surprised that MOS and POT are the top two holdings representing approximately 17% of the weighted portfolio.

Any way you choose to look at the prospects for the agricultural fertilizer business, it certainly looks promising and the need for what it produces has never been greater.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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