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Fertilizer Stocks Growing Profits
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ShareThe company earned $840 million, the second-highest total for any quarter in their history and 81 percent above the $480 million earned in the same period last year. This income translated to EPS of $0.96 versus Wall Street expectations of only $0.86.
According to the company, "This result raised earnings for the first half of 2011 to a record $1.79 per share, 18 percent above the previous high set in 2008 and significantly above the $1.01 per share earned in the first half of 2010."
Growing Forward
Strong demand and pricing for all three primary plant nutrients the company produces -- potash, phosphate and nitrogen -- caused management to boost its outlook for third-quarter 2011 EPS to a range of $0.80-$1.00 per share and full-year guidance was raised to $3.40-$3.80 per share. Again from the company press release Thursday...
"Higher prices for all three nutrients and continuing strong demand, especially for potash and phosphate, pushed second-quarter gross margin to $1.2 billion, double the $0.6 billion generated in the same quarter of 2010. Gross margin for the first six months of 2011 reached $2.3 billion, a substantial increase over the $1.3 billion earned in the same period last year."
The Zacks Consensus Estimates for POT were at $0.84 for the third quarter and $3.50 for the full-year 2011, with two analysts raising projections just this week before the company’s report. We are likely to see more analysts now raise their estimates in the next week or so based on the strong results and outlook from the company.
POT is currently a Zacks #1 Rank (strong buy) and earned that rating on July 18 when the stock was trading $58. The stock was up over 3.5% to $61.35 at one point in morning trade, but has seen heavy profit taking since driving shares below $59.50.
This move up to a strong buy ranking was generated by the Zacks system when about one-third of the analysts covering the name raised their estimates the week before. POT has now beaten analyst estimates by an average of over 15% for the last five quarters.
Bunge Profit Harvest on Global Trade, Tight Supplies
The other agriculture name reporting today was Bunge Ltd. (BG - Snapshot Report), who topped analyst estimates by over 20% with second-quarter adjusted EPS of $1.78 versus the Zacks Consensus of $1.47. Bunge is an integrated global agribusiness and food company spanning the farm-to-consumer food chain.
Bunge processes, produces, moves, distributes and markets food on five continents and therefore is more broadly diversified in the Ag space than Potash. They even have a Sugar & Bioenergy business segment which produces alternative fuels. BG's business performance is thus greatly indicative of the world-wide agricultural markets.
Drew Burke, Chief Financial Officer, stated, "We expect a good second half with results weighted to the fourth quarter. The agribusiness markets will be characterized by the Northern Hemisphere harvests and continued strong global trade in response to the relatively tight supply situation. We expect our agribusiness results to continue to be driven by our grain business."
Burke also commented in the company press release on the outlook for fertilizer sales coming from the Southern Hemisphere growing season. These are extremely important markets since Brazil is such a "bread basket" to China.
"In fertilizer, farm economics are strong, South America is entering its high volume period and our expectations for the business are on track. The Brazilian industry is expecting annual volume growth of approximately 7%, which implies that there is about 60% of the total volume remaining to be sold between July and December."
BG shares initially reacted positively to the company report with a gap open nearly $2 higher from $71 and an eventual push above $73. But the stock has met with selling most of the day on heavy volume, pushing shares down to nearly $68.
CF Industries and Agrium On Deck
CF Industries Holdings, Inc. (CF - Analyst Report) is the holding company for the operations of CF Industries, a major producer and distributor of nitrogen and phosphate fertilizer products.
CF operates world-scale nitrogen fertilizer plants in Louisiana and Alberta, Canada; conducts phosphate mining and manufacturing operations in Central Florida; and distributes fertilizer products through a system of terminals, warehouses, and associated transportation equipment located primarily in the midwestern United States.
With a market capitalization of just over $11 billion, the stock trades at a forward P/E multiple of just 9 times. CF became a Zacks #1 Rank (strong buy) in late May when shares were trading below $140.
Since then, the stock made its 52-week high above $163 on July 25. The company is scheduled to report Q2 earnings on August 4 with consensus expectations for EPS of $5.31.
Ranking the Fertilizer Stocks
Fertilizer companies currently have a very strong industry rank of #11 in the Zacks universe of 265 industry groups. This is due to both POT and CF having #1 Rank (strong buy) ratings. Also in this group are Mosaic (MOS - Snapshot Report) with a Zacks #3 Rank (hold), Intrepid Potash (IPI - Snapshot Report) at a #2 Rank (buy), and Agrium (AGU - Analyst Report), which today moved down a notch from #1 to #2.
Both AGU and IPI report earnings on August 3. Bunge is not in this group, of course, because of their broader diversification in agribusiness industries.
While fertilizer stocks have done well for investors in the past two years since the recession lows, there may be more upside ahead in the strongest names. As proof, one can look at company growth outlooks and analyst earnings estimates that continue to rise. Check the Zacks Rank every day on your favorite names to keep your finger on the pulse of their earnings momentum.
For another great piece of market-based evidence, look at the takeover bid by BHP Billiton (BHP - Analyst Report) for Potash last year. BHP was smart to try and concentrate their potash holdings and become the biggest player on the planet, but they just didn't want to pay enough for the company.
POT's market cap at $51 billion is now 30% higher today than BHP's highest bid. Investors who have continued to believe in the global agricultural and commodity boom, and stayed with these stocks, are probably not at all surprised to find that you reap what you sow. For more on the equipment manufacturers reaping profits in the "decade of food", see my recent report "Industrial Strength Power", which looks at CNH Global (CNH - Snapshot Report) as a premier value and growth play alternative to Deere (DE - Analyst Report).
Kevin Cook is a Senior Stock Strategist at Zacks.com
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