People Still Need to Eat: Fertilizer Stocks Oversold

The already dramatic sell-off in the fertilizer sector during the past two months got much worse on Thursday as Potash Corp. of Saskatchewan Inc. (POT), Agrium Inc. (AGU) and The Mosaic Co. (MOS) saw huge declines. Downgrades from “buy” to “underperform” at Merrill Lynch (MER) were partly to blame as the firm cited doubts about the near-term demand for fertilizer. On Wednesday, Mosaic said that its quarterly profit would fall short of expectations.

But Agrium’s chief financial officer, Bruce Waterman, might have put it best when he said, “What it really comes down to is no individual company can stand up to a tidal wave of panic selling.”

During the last bear fertilizer market in 1998, forward price-to-earnings multiples were in the range of ten to 12 times actual earnings, according to CIBC World Markets analyst Jacob Bout. With North American fertilizer producers trading at 3.2x 2009 consensus earnings per share estimates, he told clients that either there is some deep value in the sector or earnings estimates need to come down.

The analyst laid out a worst-case scenario where oil is at $50 per barrel and corn is less than $3 a bushel. This, along with lower prices for a range of fertilizers (C$300/t for nitrogen, C$400/t for phosphate and C$500/t for potash), would still allow Agrium to earn $6.75 per share and Potash $13.65. “Applying a peak multiple,” he added, “would imply that both companies are still attractive using a doomsday outlook.”

CIBC suggested that it is unlikely that 2009 will be a peak year for agriculture and fertilizers since grain inventories remain at historic lows that will take years to rebuild. The potash market is short and no significant supply response is expected for three years, it noted.

Mr. Bout, who recommended investors buy both Agrium and Potash Corp., said:

The single most important factor that separates agriculture and fertilizer from all other commodities is that despite current global economic conditions, people still need to eat.

Citigroup analyst Brian Yu noted that North American potash producer inventories currently stand at a very tight two weeks of production. And with China receiving three million tons less product in 2008 versus 2007 and North American production reduced by strikes at three mines, the global potash market remains supply constrained.

He called the sell-off in Mosaic shares “excessive” given that it has $700-million, or $1.57 per share, of net-cash and is expected to receive $800-million in pre-tax proceeds from the sale of Saskferco. The analyst expects Mosaic’s cash will climb to almost $4.9-billion by the end of fiscal 2009.

Canaccord Adams, however, joined the bullish camp for fertilizer producers on Wednesday, lowering its target prices and multiples for Agrium, Potash Corp. and Mosaic "due to the continued deterioration of the global stock markets and the continued fear of a global recession."  As a result, analyst Keith Carpenter's targets move from C$425 per share to C$150 for Potash Corp., from C$160 to C$50 for Agrium, and from $210 to $52 for Mosaic.

He told clients that while his long-term view on the agricultural sector has not changed in terms of growth in grain and oilseed usage, expectations for commodity prices have.

The analyst said in a research note:

The fact that Mosaic missed the quarterly numbers is not the issue. The fact that the company felt the need to significantly reduce phosphate output over the next few months speaks volumes about the status of the current fertilizer demand outlook.

Dennis Gartman, who said he has been aggressively short Potash Corp. in his own account for several weeks recently, covered that position on Thursday afternoon. “We are now on the sidelines,” he wrote in The Gartman Letter. “It seems the safest place to be.”

Comments

[User 226404:]

"As a result, analyst Keith Carpenter's targets move from C$425 per share to C$150 for Potash Corp., from C$160 to C$50 for Agrium, and from $210 to $52 for Mosaic."

wow, haha, hehe, all these anals' target game is a joke, but very funny.

2008 Oct 05 10:47 AM

[yank:]

Agree that analysts simply are playing their usual "dirty tricks game". Gee, POT "only" grew EPS several hundred percent Yoy. Why would I own a company generating that kind of cash when I can chase speculative, bankrupt financial companies. Give me a break! The analysts are the referee in a footballl game ordering that the goalposts be moved closer (or further away from) to the kick depending on who's kicking. If it's a commodity company make the kick as long as possible. It's almost as if POT was the kicker getting ready to make a 30 yard field goal to win the game and the referee decided to move the ball out to the 50 yard line. Sorry about that guys. It also works in reverse. With the Financials they simply lower the estimates to dirt cheap and then when they beat, the backslapping begins and the all-clear is sounded to buy Financials again. The whole nauseating process is rigged and rotten to the core. Wall St. really does deserve to go out of business. Financial capitol of the world? My ass.

2008 Oct 05 12:15 PM

[einstein p ...:]

"Canaccord Adams, however, joined the bullish camp for fertilizer producers..." Huh? Boy, I'd hate to see the new price targets if they ever get bearish.

2008 Oct 05 12:51 PM

[John-Galt:]

Buy when the blood is in the streets. POT seems like a slam dunk, and MON a goood long term play. Potash supplies are slow to come online, and are well known. Unlike Phos and Nit, which can ramp up and down more quickly, potash takes a while to respond. It also has some built-in demand, since it is underused relative to N & P in the fertilizer mix of most countries. Of course any crash in N & P could alter this balance somewhat as they can just add a LOT more N instead of some K. The downside of that choice is groundwater pollution. I am not betting the farm, but I am adding to my POT position, expecting earnings will correct stock prices within 6-9 months. China can quit buying steel, even coal, but if they quit feeding people there will be a revolution.

2008 Oct 05 02:58 PM

[Urbane Gori...:]

Marie Antoinette "Let them eat cake"
George Bush "Let them eat sh*t"
POTheads "Let them eat fertilizer" ?????

jegan ;-)

2008 Oct 05 04:11 PM

[einstein p ...:]

China cannot stop buying coal either. They may be absent for now, but not for long. It's a typical Chinese negotiating ploy and they are some of the best negotiators in the world. Trust me, I lived and worked in Hong Kong for over 25 years. If the global economy tanks, they will turn their attention to rebuilding their infrastructure and buying undervalued assets abroad --- particularly commodities if they are allowed to do so. The metric is population and it's growing worldwide.

2008 Oct 05 06:13 PM

[Artistes:]

Are prices for potash $/ton falling, and if they are, isn't that squeezing margins? But the huge drop in POT, AGU and MOS seems like a strong buy. AGU's PE is now 6.39

2008 Oct 05 11:00 PM

[Pessimistic...:]

Einstein,
I think yolur spot on. here is thinking aloud.. how long is China going to hold out? With 2 bb served that will be one hungry country and the longer they hold their breath the more hunger.. the closer to a real revolution China could get. I have thought that they are waiting the US out on this market ploy.. and they seem to be doing well as many here are in a downward spiral panic

2008 Oct 05 11:38 PM

[Duude:]

We will shortly experience more short covering in the fertilizer stocks. They were overbought and now are oversold. Duh! More important is the low potash inventories. I wonder if in the current credit crisis government might extend credit guarantees to farmers affected by the crisis. If they can't get the credit, the season will be lost. Its not quite the same as if I can't get credit to buy a new car. Do we want to see even higher food prices in the coming months?

2008 Oct 06 12:31 AM

[Socialism c...:]

Artistes: NO...price/ton has not yet dropped. The selling is as of yet based on fear and panic, and drops in crop prices...which have dropped, and are relevant...but in my opinion not likely to drop much further due to panic buying of food to "have an emergency supply" as well as lower crop yields due to storms.

I do believe potash/fertilizer companies are oversold, and I do not expect to see much of a drop-off in potash pricing (though we may see a small drop, then remain steady...).

Disclosure: long POT.

2008 Oct 06 12:55 AM

[einstein p ...:]

Wheat and other grains, like oil, are experiencing declines in pricing while at the same time running very low inventories. It's like driving your car on fumes and hoping to find a gas station before you run out of gas. You can run on reserve for a while, but sooner or later you have to fill up the tank.

I'm not saying that the market is done going down, but I'm convinced that commodities have been oversold. You can't eat gold or heat your home with it. It's your grandfather's hedge.

2008 Oct 06 02:05 AM

[Carl Martin:]

The paragraph about Canaccord Adams is bizarre at best, and simply totally inaccurate, or perhaps dishonest at the worst. First of all, I assume the author meant bearish, not bullish as written, in regards to which "camp they have now joined." Was that just a typo, or was that a "Freudian Slip," when what one hand prints the truth, while the other hand prints what is false, and the author's mind can't see it and correct it, before readers see the lie. We will never know, as the true author is hiding behind the FP Trading Desk. For those who don't already know, Keith Carpenter was the most bullish professional analyst on Potash Corp. If he has in fact changed his evaluation, then that is very significant indeed. However, his previous evaluations were supposed to be based upon earnings estimates, not stock market activity. The article implys that Keith Carpenter is now basing his earnings target on much lower earnings. In reality, it seems like "he" is doing just the opposite. He "apparently" is no longer basing his stock price target on earnings. Instead, he is "apparently" basing his stock price target on the very real ongoing fear and deterioration in the stock markets. I wonder what measurement tool "he" is using? Or is he just being used by the author for questionable purposes? Why isn't he holding on to his previous earnings and stock price estimates, and just saying that the on going market activities will likely take the share price all over the place, but mostly downward at least short term? In other words, it will take some time to get back to fundamentals. Why would a professional suddenly become such an amateur? I wonder what Keith Carpenter would think about this article? I also wonder what you think? And how about the editors at SA???

2008 Oct 06 05:57 AM

[Trading Cajun:]

CF Industries (CF) looks attractive "on a valuation basis" with near zero debt ... EPS growth and ROE are outstanding. 3Q EPS due out about 27 October.

2008 Oct 06 08:56 AM

[Deltaxray7:]

Welllllll, as long as my holding don't make it to zero :(
I'll wait til I'm 80 to cash them in, of course
we may all be eating cat food by then :)

2008 Oct 06 11:21 AM

[maclean.anna:]

It's time to short MOS, MON, CF and the like. They are completely oversold.
Here's a good article which shows the tech analysis of each with predictions of where they are going.
Good luck...
www.greenfaucet.com/te...

2008 Oct 06 11:22 AM

[einstein p ...:]

If the global markets are melting down, then it would make sense that the earnings are too high. China seems to have disappeared for the moment, but the Chinese government has also been very critical about the Western lending standards that lead to the current crisis. In fact, they claim that they have very little exposure to the problems we face.

Last quarter POT reported better than expected earnings and raised full year guidance. The company was aware of the strike, but the credit crunch may now be a factor for this coming quarter into early 2009.

Personally, I don't know what to make of this article ---- or the market for that matter. Lot's of different opinions, no consensus.

2008 Oct 06 11:23 AM