Grow Your Portfolio With Fertilizer

Includes: POT, RNF, UAN
by: Hamlet Capital

Without fertilizer, the world as we know it would not exist. Increasing population and decreasing arable land have helped make fertilizer a critical component of modern civilization. It is with this in mind that leads investors to examine fertilizer producers as a viable, income generating possibility. Consider the following three companies.

Potash Corporation of Saskatchewan (NYSE:POT), by far the largest of the three with a market capital of $35.6 billion, produces and markets fertilizers and feed products in the U.S. and Canada. A potash miner founded in 1953, its emphasis is on solid and liquid phosphate fertilizers, but has substantial interests in nitrogen fertilizers and feed. Potash Corp. has considerable development claims in Saskatchewan and New Brunswick. Recently, the company slowed production on account of high inventories, but it still expects demand to increase by an eighth in 2013.

Rentech Nitrogen Partners (NYSE:RNF) is a smaller-capital producer of nitrogen fertilizer. It markets products in Illinois, Iowa and Wisconsin. Established in 1965, Rentech Nitrogen is a subsidiary of Rentech, Inc., and has production facilities in Texas and Illinois. Rentech utilizes natural gas as a primary feed stock for their processes. Natural gas prices are an important factor in fertilizer production. Historic low prices have kept production costs at bay. Like Potash, Rentech has sustained production halts, though in its case for mechanical failure and maintenance.

CVR Partners (NYSE:UAN), similar in scale to Rentech, engages in a North American production, distribution, and marketing of nitrogen fertilizers. Founded in 2007, CVR Partners is a subsidiary of CVR Energy, which in turn is a subsidiary of Icahn Enterprises Holdings. CVR is unique from the others in that it utilizes mainly petroleum coke as its primary feedstock instead of natural gas. Petroleum coke has a much more stable price profile than natural gas and gives CVR a measure of relief in terms of volatility. CVR overhauled its operations in October during a turnaround, and does not anticipate shutdowns in 2013.

Examining the companies' ratios, all three outfits exhibit strength relative to the industry at large. Characteristics include:

  • High returns on equity, far outperforming the industry average.
  • Excellent profit and operating margins, at least double the industry average. Rentech's profit margin of 48 percent triples the agro-chemical industry average of 15.2 percent.
  • Tidy balance sheets and debt to equity ratios less than half the industry average.
  • Competitive forward and lagging price to earnings ratios, with the highest only 75 percent of the industry average of 19.3 (lagging).

Despite these impressive statistics, some red flags are apparent. Rentech's high price to book ratio of 14.2 is triple the industry average, although its price to free cash flow ratio is less than half that of the industry. Potash is just the opposite, with a very high price to free cash flow ratio, almost triple the industry average, and a relatively low price to book ratio. CVR is slightly below the industry average for both ratios.

While quarterly revenue growth for Potash and CVR has suffered of late, Rentech is the industry star with 55.9 percent quarterly growth. This has allowed Rentech to offer a superb dividend yield of 9.0 percent. CVR's yield of 7.9 percent is nothing to scoff at, either. Potash is a laggard in this department, offering only a 2.1 percent dividend yield, slightly higher than the industry average.

Inside trades might be of concern. CVR's COO Stan Reimann has over the past few months dumped half his stock of the company. Renteck officers have since October been selling rather than buying. No recent insider trades have been recorded by Potash.

Some analysts have been a touch neurotic regarding their rating of these companies. For CVR, Barclays is neutral, while Dahlman Rose has vacillated between hold and sell ratings with a current hold recommendation. The same analysts have twice changed their opinion on Rentech from buy to hold. Feltl seems more secure in its opinion of Rentech, upgrading it from buy to strong buy, while Brean Murray maintains its buy rating. For Potash, buy recommendations have come from Stifel Nicolaus, Ticonderoga, Boenning & Scattergood and UBS. More neutral ratings were assigned by Barclays, RBC, BMO and Dahlman Rose.

Regardless of short-term price fluctuations, fertilizer producers belong to a growth industry. Demographics and immutable geography will assure increased demand in the future. It might be wise to take advantage of this sooner than later.

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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