In Search of Growth from the Fertilizer Boom

Includes: CF, MON, MOS, NTR, TRA
by: Dhinesh Ganapathiappan

The agriculture industry has long been overlooked as a mature and boring industry without any encouraging prospects for growth. Record high energy prices have led to the emergence of biofuels as a viable alternative energy and sparked a boom in agriculture demand and prices. Meanwhile, world population and per capita income continues its steady ascent adding another driver to the equation. One electrifying way individual investors can reap big profits from these conditions is investing in fertilizer companies that are positioned to take advantage of this trend.

Fertilizer companies have been rallying for over a year under the radar of most on Wall Street. Giant seed company Monsanto (NYSE:MON) has gotten some publicity for its rising profits, but many more lucrative opportunities exist within the industry.

Creating biofuels involves tapping the energy inside plants, animals, and animal by-products. Corn and wheat have been commonly grown for this purpose as rising oil prices have caused both investors and governments to embrace ethanol. Ethanol can be mixed with gasoline to produce a cleaner running fuel source, although when used in higher quantities, some fuel efficiency is sacrificed. However, with oil prices currently at $92 a barrel and rising, ethanol may become a necessity soon.

Soaring demand for ethanol has played a large part in rising wheat and corn prices. Farmers are looking to take advantage of rising prices by planting in all possible fields and increasing output through all means available. The easiest tool at their disposal is increasing fertilizer usage. Common fertilizer products include nitrogen, phosphate, and potash.

The industry giant and leader in market share of fertilizer products is Potash Corp of Saskatchewan (POT). The Canadian-based company just reported earnings that jumped 67% from a year ago. Potash Corp trades at a premium to peers because of its dominant position in the industry with many plants under operation worldwide. Constructing a new potash plant involves over $2 billion of costs, causing a formidable barrier to entry by competing firms. Potash Corp stock has ticked up methodically, adding 180% the past year. Although the company has strategic advantages, even better opportunities exist within the industry.

Mosaic Company (NYSE:MOS) competes in similar markets to Potash Corp, but trades at a cheaper price-to-earnings multiple. The current forward PE ratio based on analyst estimates is just 19. If business continues without any unexpected interruption, these estimates can be easily crushed. Taking a technical look at the stock, price appreciation has been much more consistent than Potash Corp. The company’s leverage in the marketplace leaves much room for upside. The balanced portfolio of fertilizer products also gives Mosaic a wider range of farmers to serve year-round. One concern for the company has been the large amount of debt weighing down the balance sheet, but management has been focused on pre-paying its long-term debt facilities recently. Indeed, Mosaic is a great play on all aspects of the agriculture boom.

Another strong outfit in the industry is CF Industries (NYSE:CF). CF focuses exclusively on the manufacture and distribution of nitrogen and phosphate fertilizer products. CF shares are up over 350% this year compared to 300% by Mosaic, but CF remains one of the cheapest stocks with just a 17 forward P/E. It was also recently announced that CF will be added to the S&P 400 Midcap index, creating the potential for additional buying by money managers tracking the midcap index. The market cap of the company is also under $5 billion making the possibility of another doubling very possible in the short run.

Comparing Potash, Mosaic, and CF yields three different investment objectives. Potash is the most conservative play with its ability to weather an unexpected downturn effectively, while also running a steady worldwide business. CF is the strongest play on the US agriculture market, especially if you believe ethanol demand will continue to rise. Mosaic, on the other hand, has a worldwide focus with the ability to sell products in emerging markets where demand is rising at a faster pace, while also utilizing its operating leverage to generate magnified profits.

All in all, agriculture has been one of the best performing industries of the year and current conditions signal that this will likely continue and create many highly attractive investment opportunities. Additional investment options exist including Agrium (AGU) and Terra Industries (TRA). The best way to invest is by identifying what region of the world you feel has the greatest growth potential and making your purchases when the stock of choice dips on profit taking. Agriculture is in a frenzy, and the options to harvest your own profits from the phenomenon are at your disposal.

Disclosure: Author has a long position in some or all of the above-mentioned securities.