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3 Fertilizer Stocks Worth a Look Amid Pricing Woes

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The Zacks Fertilizers industry continues to be affected by weak agricultural commodity prices. Further, prices of major fertilizers are still under pressure. Increased supply and the impact of the coronavirus pandemic are hindering the recovery of nitrogen prices. Potash and phosphate prices also remain under pressure amid elevated supply. 

Nevertheless, industry players like Nutrien Ltd. (NTR - Free Report) , The Scotts Miracle-Gro Company (SMG - Free Report) and The Mosaic Company (MOS - Free Report) are expected to benefit from higher fertilizers demand. Factors like higher farm income and expectations of increased planted acres in the United States should boost fertilizer demand in the near term.  

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, potash, nitrogen fertilizers, including urea, ammonia and urea ammonium nitrate. They also offer other nitrogen products to help farmers improve crop yield.

What’s Shaping the Future of the Fertilizers Industry

Depressed Fertilizer prices: Nitrogen prices have been under pressure this year amid supply glut. Increased global supply availability due to higher operating rates along with lower global energy prices have been exerting pressure on prices of nitrogen. The impacts of the coronavirus pandemic are also expected to hinder the recovery of nitrogen prices in the short term. Lower prices are denting margins of prominent nitrogen fertilizer makers including CF Industries Holdings, Inc. (CF - Free Report) . Prices of phosphate are also under pressure due to continued imbalance between supply and demand. The oversupply situation is also expected to exert pressure on potash prices in the near term.

Weakness in Crop Commodity prices: Weak agricultural commodity prices are a roadblock in the near term. Prices of major crops such as soybean and corn are under pressure, partly due to a supply glut. Moreover, the supply disruptions associated with the coronavirus pandemic are affecting global demand of agricultural commodities. Also, the pace of global commodity production has exceeded its demand, leading to persistent decline in commodity prices, including soybeans and corn. Although demand is improving of late, commodity prices are likely to remain under pressure in the near term amid higher supply.

Upbeat Farm Income Projections: Per the U.S. Department of Agriculture’s (USDA) latest outlook, net farm income is projected to grow 22.7% year over year to $102.7 billion in 2020. Further, net cash farm income is estimated to rise 4.5% year over year to $115.2 billion this year. Higher farm income is expected to drive farmers’ demand for crop nutrients. Expectations of higher planted corn and soybean acres in the United States in 2020 also suggest a pickup in crop nutrient demand.  

Zacks Industry Rank Reflects Grim Prospects

The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #211, which places it at the bottom 17% 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 bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Despite the industry’s weak near-term prospects, we will present a few stocks that you may want to consider for your portfolio. Before that, it’s worth taking a look at the industry’s stock market performance and current valuation.

Industry Trails Sector & S&P 500

The Zacks Fertilizers industry has lagged the broader Zacks Basic Materials sector and the Zacks S&P 500 composite in the past year.

The industry has declined 8.2% against the S&P 500’s rise of 12.2% and the broader sector’s growth of 9.5%.


Industry’s Current Valuation

On the basis of 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 9.2X compared with the S&P 500’s 14.91X and the sector’s 7.68X.

In the past five years, the industry has traded as high as 21.48X and as low as 5.88X, with a median of 9.63X, 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

Scotts Miracle-Gro: This Marysville, OH-based company is a leading producer and marketer of branded garden and consumer lawn products. It is likely to gain from bright prospects and cost-saving opportunities associated with its Hawthorne division. Also, it is one of the world’s leading marketers of indoor and hydroponic growing products. It is also witnessing strong momentum in the U.S. Consumer segment. Moreover, the company will likely gain from the synergies of the Sunlight Supply acquisition. The buyout creates unique competitive advantages for the Hawthorne division.   

Scotts Miracle-Gro carries a Zacks Rank #2     (Buy). The Zacks Consensus Estimate for fiscal 2020 earnings for this company has moved up 1.5% in the past 30 days. The company has also seen its shares rally 24% in the past six months. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Price: SMG

Mosaic: The Minnesota-based company is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. The company is well-positioned to leverage increasing global demand for fertilizers. Global demand for potash in the second half of 2020 is likely to remain strong, especially in Brazil, India and Southeast Asia. The acquisition of Brazil-based Vale S.A.’s Vale Fertilizantes has also helped the company to capitalize on the rapidly growing Brazilian agricultural market. The company is also taking actions to cut costs amid a challenging operating environment. This is likely to lead to an improvement in its operating cost structure and boost profitability.

Mosaic carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for its 2020 earnings has moved up 8.8% in the past 30 days. The stock has also surged 59.1% in the past six months.

Price: MOS

Nutrien: This Saskatoon, Canada-based company is a leading provider of crop inputs and services. It is likely to gain from acquisitions and initiatives to unveil its new digital seed recommendation tool. The company is also continuing to grow its footprint in Brazil with the buyout of Tec Agro acquisition. It recently acquired AGBRIDGE, which will help the company to grow in North American market. The company is also expected to gain from strong potash sales volumes through the remainder of 2020.

Nutrien currently carries a Zacks Rank #3. The Zacks Consensus Estimate for 2021 earnings for this company has moved up 0.9% in the past 30 days. The stock has also gained 13.4% in the past six months.

Price: NTR

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