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3 Fertilizer Stocks to Watch Amid Industry Headwinds
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The Zacks Fertilizers industry is reeling under the effects of weaker fertilizer prices on demand softness as growers have reduced application rates partly due to affordability issues. An uptick in the cost of key raw materials partly due to the Russia-Ukraine war has also put pressure on the margins of companies in this space.
However, supportive global agricultural fundamentals and healthy farm economics augur well for the industry. Fertilizer players such as CF Industries Holdings, Inc. (CF - Free Report) , ICL Group Ltd (ICL - Free Report) and Intrepid Potash, Inc. (IPI - Free Report) are worth a look, notwithstanding the near-term headwinds.
About the Industry
The Zacks Fertilizers industry comprises producers, distributors and marketers of crop nutrients for the global agriculture industry. Companies in this space offer nutrients such as phosphates (including diammonium phosphate, monoammonium phosphate and phosphoric acid), potash and nitrogen (including urea, ammonia and urea ammonium nitrate) fertilizers. They also provide other nitrogen products to help farmers maximize crop yield. Crop nutrients are essential to drive agricultural productivity and boost the natural fertility of the soil. Demand for these nutrients is being supported by the need to increase the production of grains to address rising food consumption globally. Moreover, the constant need of growers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing global population drives the consumption of fertilizers.
What's Shaping the Future of the Fertilizers Industry?
Softer Fertilizer Prices to Weigh on Margins: Fertilizer prices surged to historic high levels in the first half of 2022, riding on the impacts of the war in Ukraine that led grain prices shooting to record levels and export curtailments in China to meet domestic demand. Disruptions due to the sanctions in Belarus also contributed to the spike. However, prices of phosphate and potash declined in the back half of the year from their peak levels due to the weakening of demand. Escalating costs led to growers reducing fertilizer applications or switching to less fertilizer-intensive crops, leading to softer demand. Global nitrogen prices have declined since the beginning of 2023. Higher global supply driven by increased global operating rates due to lower global energy costs has resulted in a decline in prices. While fertilizer prices have stabilized somewhat, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Concern: A spike in key raw material prices poses a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — remain elevated. Plant shutdowns and maintenance have led to a tight supply of these raw materials, which, coupled with strong demand, has pushed up their prices. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.
Agricultural Fundamentals Remain Favorable: While the coronavirus pandemic stung a vast spectrum of industries, agriculture was relatively unscathed, given the sustained rise in food demand globally. Moreover, strong global demand coupled with supply worries stemming from Russia’s invasion of Ukraine boosted crop commodity prices. Higher freight, energy and labor costs and raw material shortages contributed to the upside. While prices of corn, soybean and wheat have declined from the multi-year highs reached in 2022, they remain elevated and supportive. Farmer economics also remain attractive in most global growing regions on strong crop demand. Expectations of high levels of planted corn and soybean acres globally also suggest a pickup in fertilizer demand.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #237, which places it in the bottom 6% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Fertilizers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 23.1% over this period compared with the S&P 500’s rise of 29.4% and the broader sector’s increase of 6.9%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing fertilizer stocks, the industry is currently trading at 10.04X compared with the S&P 500’s 14.72X and the sector’s 11.13X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.94X, with a median of 12.16X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Fertilizer Stocks to Keep a Close Eye on
CF Industries: Illinois-based CF Industries is a leading global manufacturer of nitrogen and hydrogen products for fertilizer, clean energy, emissions reduction and other industrial applications. It is gaining from higher nitrogen fertilizer demand in the major markets. CF is seeing higher nitrogen demand for industrial uses in North America. Lower natural gas prices are also acting in the company’s favor. CF remains committed to boosting shareholders’ value by leveraging strong cash flows.
CF Industries currently carries a Zacks Rank #3 (Hold). CF delivered a trailing four-quarter earnings surprise of 5%, on average. It also has an expected long-term earnings per share growth rate of 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CF
ICL Group: Israel-based ICL is engaged in the fertilizer and specialty chemical sectors. The company remains focused on growing its specialties businesses. Efforts to boost operating efficiency and productivity and the launch of new innovative solutions should support its results. The acquisition of Nitro 1000 also allows ICL to expand its market position and leadership in Brazil's specialty plant nutrition.
ICL Group currently carries a Zacks Rank #3. ICL’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 15.7%, on average.
Price and Consensus: ICL
Intrepid Potash: Colorado-based Intrepid Potash is the only producer of muriate of potash in the United States and also makes a specialty fertilizer, Trio. It is gaining from a healthy demand environment aided by strong farmer economics and favorable crop prices. A recovery in economic activities is driving demand for its specialty fertilizer, Trio. Higher demand for key products is expected to drive IPI’s volumes. The company also remains focused on executing its capital projects, which are expected to drive its production.
Intrepid Potash currently carries a Zacks Rank #3. IPI has a projected earnings growth rate of 72% for 2024. The Zacks Consensus Estimate for 2024 earnings for IPI has been revised 61.1% upward over the past 60 days.
Price and Consensus: IPI
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3 Fertilizer Stocks to Watch Amid Industry Headwinds
The Zacks Fertilizers industry is reeling under the effects of weaker fertilizer prices on demand softness as growers have reduced application rates partly due to affordability issues. An uptick in the cost of key raw materials partly due to the Russia-Ukraine war has also put pressure on the margins of companies in this space.
However, supportive global agricultural fundamentals and healthy farm economics augur well for the industry. Fertilizer players such as CF Industries Holdings, Inc. (CF - Free Report) , ICL Group Ltd (ICL - Free Report) and Intrepid Potash, Inc. (IPI - Free Report) are worth a look, notwithstanding the near-term headwinds.
About the Industry
The Zacks Fertilizers industry comprises producers, distributors and marketers of crop nutrients for the global agriculture industry. Companies in this space offer nutrients such as phosphates (including diammonium phosphate, monoammonium phosphate and phosphoric acid), potash and nitrogen (including urea, ammonia and urea ammonium nitrate) fertilizers. They also provide other nitrogen products to help farmers maximize crop yield. Crop nutrients are essential to drive agricultural productivity and boost the natural fertility of the soil. Demand for these nutrients is being supported by the need to increase the production of grains to address rising food consumption globally. Moreover, the constant need of growers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing global population drives the consumption of fertilizers.
What's Shaping the Future of the Fertilizers Industry?
Softer Fertilizer Prices to Weigh on Margins: Fertilizer prices surged to historic high levels in the first half of 2022, riding on the impacts of the war in Ukraine that led grain prices shooting to record levels and export curtailments in China to meet domestic demand. Disruptions due to the sanctions in Belarus also contributed to the spike. However, prices of phosphate and potash declined in the back half of the year from their peak levels due to the weakening of demand. Escalating costs led to growers reducing fertilizer applications or switching to less fertilizer-intensive crops, leading to softer demand. Global nitrogen prices have declined since the beginning of 2023. Higher global supply driven by increased global operating rates due to lower global energy costs has resulted in a decline in prices. While fertilizer prices have stabilized somewhat, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Concern: A spike in key raw material prices poses a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — remain elevated. Plant shutdowns and maintenance have led to a tight supply of these raw materials, which, coupled with strong demand, has pushed up their prices. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.
Agricultural Fundamentals Remain Favorable: While the coronavirus pandemic stung a vast spectrum of industries, agriculture was relatively unscathed, given the sustained rise in food demand globally. Moreover, strong global demand coupled with supply worries stemming from Russia’s invasion of Ukraine boosted crop commodity prices. Higher freight, energy and labor costs and raw material shortages contributed to the upside. While prices of corn, soybean and wheat have declined from the multi-year highs reached in 2022, they remain elevated and supportive. Farmer economics also remain attractive in most global growing regions on strong crop demand. Expectations of high levels of planted corn and soybean acres globally also suggest a pickup in fertilizer demand.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #237, which places it in the bottom 6% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates a gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Fertilizers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 23.1% over this period compared with the S&P 500’s rise of 29.4% and the broader sector’s increase of 6.9%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing fertilizer stocks, the industry is currently trading at 10.04X compared with the S&P 500’s 14.72X and the sector’s 11.13X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.94X, with a median of 12.16X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Fertilizer Stocks to Keep a Close Eye on
CF Industries: Illinois-based CF Industries is a leading global manufacturer of nitrogen and hydrogen products for fertilizer, clean energy, emissions reduction and other industrial applications. It is gaining from higher nitrogen fertilizer demand in the major markets. CF is seeing higher nitrogen demand for industrial uses in North America. Lower natural gas prices are also acting in the company’s favor. CF remains committed to boosting shareholders’ value by leveraging strong cash flows.
CF Industries currently carries a Zacks Rank #3 (Hold). CF delivered a trailing four-quarter earnings surprise of 5%, on average. It also has an expected long-term earnings per share growth rate of 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CF
ICL Group: Israel-based ICL is engaged in the fertilizer and specialty chemical sectors. The company remains focused on growing its specialties businesses. Efforts to boost operating efficiency and productivity and the launch of new innovative solutions should support its results. The acquisition of Nitro 1000 also allows ICL to expand its market position and leadership in Brazil's specialty plant nutrition.
ICL Group currently carries a Zacks Rank #3. ICL’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 15.7%, on average.
Price and Consensus: ICL
Intrepid Potash: Colorado-based Intrepid Potash is the only producer of muriate of potash in the United States and also makes a specialty fertilizer, Trio. It is gaining from a healthy demand environment aided by strong farmer economics and favorable crop prices. A recovery in economic activities is driving demand for its specialty fertilizer, Trio. Higher demand for key products is expected to drive IPI’s volumes. The company also remains focused on executing its capital projects, which are expected to drive its production.
Intrepid Potash currently carries a Zacks Rank #3. IPI has a projected earnings growth rate of 72% for 2024. The Zacks Consensus Estimate for 2024 earnings for IPI has been revised 61.1% upward over the past 60 days.
Price and Consensus: IPI
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