In the winter months in the northern hemisphere it's easy to forget about the agriculture sector because everything goes dormant. But the companies that provide the farmers with fertilizer know the cycles and see world demand still continuing to grow in 2013.
Case in point is Yara International's continued expansion in Brazil. On Dec 7, the Norwegian-based fertilizer giant announced it was acquiring Bunge's fertilizer assets in Brazil, including its brands, warehouses and 22 blending facilities, for $750 million in cash.
Bunge is keeping its fertilizer terminal and entered into an agreement with Yara to continue to supply it with fertilizer. The deal is expected to significantly boost Yara's fertilizer production in Brazil over the next several years.
It's expected to close in the second half of 2013.
This deal is a sign of things to come as the fertilizer companies expand into South America's agriculture market. But North America continues to be a strong market as well.
Investors Are Ignoring Agriculture
The agriculture sector, including the fertilizers, seems to be out of favor with investors. It doesn't have the buzz it did several years ago as potash prices soared and the companies were big growth stories.
While growth has certainly slowed as potash and phosphate prices have weakened, the nitrogen side of the equation still has pricing power. That is boosting the nitrogen fertilizer producers.
Investors, however, are staying away from both the potash AND the nitrogen fertilizer stocks. Yet both have a rosy outlook.
4 Cheap Fertilizer Stocks
The fertilizer stocks are out of favor with investors. That has created an opportunity for value investors. These four fertilizer companies are trading well below the average of the S&P 500.
- Agrium: Forward P/E of 10.4
- CF Industries Holdings: Forward P/E of 7.7
- Mosaic: Forward P/E of 11.9
- Yara International: Forward P/E of 7.8
- S&P 500 Average: P/E = 14
But earnings growth is going to be hard to come by for some in 2013. Farmers had record income in 2012 but the drought threw a wrench in what would have been one of the best years ever for agriculture. However, agriculture analysts still expect farming income to be close to record highs again in 2013.
They should still be spending on fertilizer and farm equipment but it's going to be difficult for companies to top 2012 EPS.
- Agrium: EPS growth of 4.5% in 2013
- CF Industries: EPS growth expected to decline 6% in 2013
- Mosaic: EPS growth of 11% in Fiscal 2014
- Yara: EPS growth expected to decline 7.5% in 2013
Each Company Has Its Niche
Not all of the fertilizer companies are the same. Some are exclusively fertilizers and others are not. But all 4 of these companies have Zacks Ranks of #1, #2 or #3.
- Agrium (AGU - Analyst Report) is a Zacks #3 Rank (Hold). It is the most complete agriculture company of the four. It makes all three major fertilizers including nitrogen, phosphates and potash, but it also has an agribusiness side where it sells seeds and crop protection directly to farmers. Agrium is headquartered in Calgary and yields a 1% dividend.
- Illinois-based CF Industries Holdings (CF - Analyst Report) is a Zacks #2 Rank (Buy). The company is the second largest nitrogen fertilizer maker in the world and the third largest phosphate manufacturer. It pays a dividend yielding 0.8%.
- Mosaic (MOS - Analyst Report) is a Zacks #3 Rank (Hold). It is on the potash side, producing potash and phosphate. In its guidance update on Nov 13, the company said it still expects record global phosphate and potash shipments in 2013. It has the highest dividend yield of these four at 1.9%.
- Yara International (YARIY) is a Zacks #1 Rank (Strong Buy). Based in Norway, it is a global company with customers in 150 countries. It is also the world's largest producer of ammonia, nitrate and complex fertilizer. It has about 20% of the global ammonia trade.
Don't Count Out Agriculture
While the financial media is obsessing over the big tech names or the financials, do your homework. For value investors, it's a great time to be in agriculture, especially the fertilizers. In the emerging markets, one of the largest business opportunities in the next decade will be feeding the expanding middle class, with its emphasis on beef and fast food.
Look outside the box at the fertilizer companies.
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[In full disclosure, the author of this article owns CF.]
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.