Fertilizers industry is riding on strong demand and pricing fundamentals for major crop nutrients including phosphate and potash. The underlying strength of the agricultural market, a rally in crop commodity prices and healthy farm economics are spurring demand for fertilizers globally. Industry players like Nutrien Ltd. ( NTR Quick Quote NTR - Free Report) , Yara International ASA ( YARIY Quick Quote YARIY - Free Report) , The Mosaic Company ( MOS Quick Quote MOS - Free Report) and CF Industries Holdings, Inc. ( CF Quick Quote CF - Free Report) are poised to gain from higher demand for fertilizers in the major markets. Factors like healthy farm income and expectations of increased planted acres are expected to drive demand globally 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 (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 soil’s natural fertility. Demand for these nutrients is being supported by the need to grow 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
The companies in the fertilizers space are well placed to benefit from strong global demand and prices for major crop nutrients. Demand for fertilizers in the United States is likely to be fueled by solid farm profits and higher planted acreage. Strong farmer economics are also expected to support demand in major markets such as Brazil and India. Phosphate markets are likely to remain robust in the near term on solid demand and pricing dynamics. Tight availability along with firm demand is driving up phosphate prices globally. Potash prices have also strengthened on the back of robust global demand, aided by strong grower economics, higher crop prices and low global inventory levels. Demand for nitrogen fertilizer also remains healthy in major markets. Global nitrogen requirement is being driven by demand in North America, India and Brazil. Healthy corn acres in the United States are expected to spur up nitrogen demand in North America. Moreover, demand for urea imports into Brazil and India remains favorable. Lower global supply availability and a spike in energy prices are also likely to boost nitrogen prices. Strong Demand and Pricing for Nutrients: While the coronavirus pandemic stung a vast spectrum of industries, agriculture was left unscathed given the sustained rise in food demand globally. Moreover, strong global demand and tightened supply provided a boost to crop commodity prices. Prices of corn and soybean have rallied to multi-year highs. Higher agricultural commodity prices augur well for crop nutrient demand over the near term. Expectations of higher planted corn and soybean acres globally this year on the back of higher crop prices also suggest a pickup in fertilizer demand. Agricultural Fundamentals Remain Strong: Farm economics have strengthened in the United States on the back of government support and a spike in crop commodity prices. Per the U.S. Department of Agriculture (“USDA”), net farm income is projected to be $111.4 billion in 2021. While net farm income is forecast to decline 8.1% from the 2020 level due to lower federal payments to farmers, it would still be 21% higher than its 2000-19 average, based on USDA projections. It is worth noting that farm profits surged to their highest level in seven years in 2020 on the back of record levels of federal payments in the wake of the pandemic. Notwithstanding the expected year-over-year decline, solid farm income backed by higher agricultural commodity prices is likely to drive farmers’ spending on crop nutrients this year. Healthy Farm Economics: Zacks Industry Rank Reflects Upbeat Prospects
The Zacks Fertilizers industry is part of the broader Zacks
Basic Materials sector. It carries a Zacks Industry Rank #61, which places it at the top 24% 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 bright near term. 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. 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 Tops Sector & S&P 500
The Zacks Fertilizers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 76.4% over this period compared with the S&P 500’s rise of 37.5% and the broader sector’s increase of 36.4%. 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 14.01X compared with the S&P 500’s 18X and the sector’s 8.3X.
In the past five years, the industry has traded as high as 21.98X and as low as 6.04X, with a median of 12.67X, as the chart below shows. Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
4 Fertilizer Stocks to Keep a Close Eye on
Nutrien: This Canada-based company is a leading provider of crop inputs and services. The company should benefit from solid demand and higher prices for fertilizers, especially potash. It is expected to gain from strong potash sales volumes this year on the back of solid domestic and overseas demand. Nutrien is also well placed to gain from acquisitions, cost efficiency and increased adoption of its digital platform. The company also continues to expand its footprint in Brazil through acquisitions, including Tec Agro. Nutrien currently sports a Zacks Rank #1 (Strong Buy). It has expected earnings growth of 105.6% for the current year. The Zacks Consensus Estimate for current-year earnings has moved up 16.7% in the past 60 days. The stock has also rallied around 83% over the past year. Price and Consensus: NTR
Yara International: The Norway-based company is a leading supplier of mineral fertilizers with particular strength in nitrogen-based fertilizers. It should benefit from the strength in the nitrogen fertilizer market. Rising nitrogen prices are expected to lend support to its margins. Yara should also gain from a recovery in its industrial business on the back of a rebound in demand. The company, carrying a Zacks Rank #3 (Hold), has expected earnings growth of 44.8% for the current year. The consensus estimate for earnings for the current year has been revised 13.8% upward over the last 60 days. The stock has also gained roughly 47% over the past year. Price and Consensus: YARIY
Mosaic: The Florida-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 and higher realized prices in its businesses. It is also taking measures to cut costs in a still-challenging operating environment. Its actions to improve the operating cost structure through transformation plans are expected to boost profitability. Transformational savings are also expected to drive margins in its Mosaic Fertilizantes segment. Mosaic, carrying a Zacks Rank #3, has expected earnings growth of 280% for the current year. The Zacks Consensus Estimate for current-year earnings for the company has moved up 1.9% in the past 60 days. The stock has also rallied around 133% over the past year. Price and Consensus: MOS
CF Industries: The Illinois-based company is a leading global manufacturer of nitrogen and hydrogen products for fertilizer, clean energy, emissions abatement and other industrial applications. The company should benefit from higher nitrogen fertilizer demand in major markets. Higher nitrogen prices are also expected to support the company’s bottom line. CF Industries also remains committed to boost shareholders’ value by leveraging strong cash flows. The company, carrying a Zacks Rank #3, has expected earnings growth of 168% for the current year. The consensus estimate for the current year has been revised 30% upward over the last 60 days. The stock has also gained around 62% over a year. Price and Consensus: CF