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Fertilizer Stocks a Growth & Value Harvest

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October 08, 2011 - Fertilizer Stocks a Growth & Value Harvest - By Zacks Investment Research

By Kevin Cook

Companies that provide vital soil nutrients will be key investments in the global agricultural megatrend now underway. And now is an especially good time to look at some of the top names as their share prices have come down so hard recently and created some real values.

Doing some stock screening this morning, I found two fertilizers companies that kept popping up. Agrium Ticker AGU made it through the Zacks #1 Rank Growth Stocks Screen, which requires more than the top earnings momentum rating reserved for only 220 stocks in a universe of 4,400.

This screen also demands the following growth metrics: a minimum 20% historical growth rate and a minimum 20% projected growth rate.

And AGU joined CF Industries (CF - Analyst Report), also a #1 Rank stock, on the Zacks Growth & Value Screen because both names have very compelling valuations of around 7 times forward earnings.

It should not surprise you that AGU also shows up on the Undervalued Zacks #1 Ranks Stocks Screen.

Won't Recession Plow Ag Stock Estimates?

This is an important question to address before buying any cyclical stock as the valuations on industrial, materials, and energy companies can look really attractive as their prices drop.

But when a recession, or even just a slowdown, is getting priced-in, stock prices get hit bad long before the estimates come down. And so what looks "cheap" today may be about to get more expensive as the earnings estimate revisions roll in.

This is a theme I have been writing about since the first week of August. I said the downward earnings revisions would come in September and October. So far, they haven't been that bad.

Before I address the global-macro perspective that might help you decide if estimates could hold, or still come down further, let me show you the current consensus estimates that make these two stocks so attractive, along with their price history and recent moves...

AGU: 52wk Low - High 60.15 - 99.14 The stock has been in a slow sideways channel downtrend since the high, but traded back up to $90 in early September and then hit $60 on Tuesday's market sell-off. Now trading above $71 on this recovery rally. The company is scheduled to report earnings on November 2.

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The bottom table is a rough sketch of recent analyst action. With about 16 analysts covering AGU, 2 have raised their estimates for the current quarter and for next year within the past 30 days, and 1 analyst upped their targets in the past week. This is one part of the "intel" that goes into the Zacks Rank along with the magnitude of the revision and accuracy of the analyst.

CF: 52wk Low - High 97.79 - 192.68 Made its surge from $150 to $190 in August when the rest of the market was melting down. Dropped below $120 this week and now trading $140. Earnings are expected Nov 1.

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CF also has a couple of recent upward revisions. But you may also notice that next year's consensus reflects a drop in EPS. If the high estimates near $24 are correct, this stock could indeed be an extreme value here. Time and further revisions will tell.

Where's the Big Guy?

You didn't think I was going to write about fertilizer stocks and leave out Potash of Saskatchewan Ticker POT? The behemoth of the essential soil nutrient it is named for has also had some recent earnings estimate revisions which basically balance out as the current quarter was taken down and next quarter raised.

Based on consensus estimates, POT looks poised to grow EPS at 16% next year after hitting 85% growth this year. 2011 and 2012 projected earnings of $3.79 and $4.42, respectively, combine to create a forward P/E multiple of 12 times for this Zacks #2 Rank (buy) stock. POT is due to report on October 27.

Finally we should mention Mosaic Ticker MOS as their outlook has softened. Since they missed their EPS number for the most recent quarter when they reported last week, most analysts (12 of 14) have lowered estimates for the current year while 4 vs. 7 have raised vs. lowered their outlook for next year. This mixed bag knocked the stock down to a Zacks #3 Rank (hold) on September 27.

The Global Ag Megatrend

I have written often about the global megatrend of food demand, even calling this the "decade of food" as the world population tops 7 billion on its way to a projected 9 billion by 2050.

It's not just population growth driving agricultural trends. Emerging economies have billions of people who also aspire to raise their food choices along with their living standards. More meat-based diets mean more grain than ever will be demanded.

Okay, so that's the big secular trend driving things for the next several years. But what about the next six months, especially if recession becomes reality? According analysts at Macquarie Equities Research, generally "the demand for agriculture commodities has been immune to economic downturns with lower income elasticities of demand compared to either industrial metals or energy."

My outlook is that there will be no recession and that with these important stocks so cheap, one or two should be considered for the commodity portion of one's portfolio. And this isn't about "buy and hold" for years either.

With the excellent trading swings the fertilizer stocks tend to make, their resurgent bull markets should offer some good opportunities over the next several years to capture 10-30% gains every few months.

Kevin Cook is a Senior Stock Strategist with Zacks

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