The Zacks Fertilizers industry consists of 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, as well as other nitrogen products. These nutrients are used by farmers to improve crop yields.
Here are the three major themes in the industry:
- Strong usage in major consumer markets (primarily India and Brazil) is driving demand for primary crop nutrients. Global phosphate and potash market fundamentals are improving along with strong demand growth. Global nitrogen supply is also expected to be lower while demand is likely to remain strong in the short term. Higher corn acres in the United States along with an expected increase in wheat plantings are likely to drive nitrogen demand in North America.
- Prices of primary crop nutrients are gaining strength on the back of strong global demand and tightened supply. Healthy demand along with reduced supply, especially from China, is providing support to global prices of nitrogen. Enforcement of environmental regulations are limiting export volumes from China. Global nitrogen demand and supply balance is likely to tighten further and boost nitrogen prices. Lower Chinese exports and slower-than-expected ramp up of new facilities have also contributed to tighter phosphates supply, providing support to prices. Tighter market conditions have also boosted potash prices.
- Weak agricultural commodity prices are a roadblock in the near future. Prices of major crops (such as corn and soybeans) are at multi-year lows due to a supply glut. Also, trade tussle between the United States and China are weighing on crop prices in North America. Moreover, weak U.S. farm income may negatively influence farmers’ nutrient-purchasing decisions.
Zacks Industry Rank Reflects Bright Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #76, which places it at the top 30% 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 bright 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.
The industry’s position in the top 50% of the Zacks-ranked industries can be attributed to a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it seems that analysts have gained confidence in this group’s earnings growth potential in the past few months. Since Sep 30, 2018, the industry’s earnings estimate for 2018 and 2019 has gone up around 3.9% and 10%, respectively.
Before we present a few fertilizer stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Tops Sector & S&P 500
The Zacks Fertilizers industry has topped the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has declined 3.6% compared with the S&P 500’s fall of 6.6% and the broader sector’s decline of 21.5%.
One-Year Price Performance
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 11.78X, above the S&P 500’s 10.07X and the sector’s 7.36X.
In the past five years, the industry has traded as high as 20.66X, as low as 6.26X, with a median of 9.65X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
In short, the Zacks Fertilizer industry has gained strength, courtesy of improving pricing and demand dynamics for major crop nutrients. Moreover, prices of primary crop nutrients are likely to gain momentum on the back of strong global demand and tight supply. Also, a favorable demand environment along with limited new supply are likely to support major crop nutrient prices. However, weakness in agricultural commodity prices is a concern in the foreseeable future.
We are presenting a stock with a Zacks Rank #2 (Buy) that is poised to grow. There are also two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Scotts Miracle-Gro Company (SMG - Free Report) : The Marysville, OH-based company, carrying a Zacks Rank #2, has an expected earnings growth of 12.7% for the current fiscal year. It also has an estimated long-term earnings growth rate of 9.1%.
Price and Consensus: SMG
The Mosaic Company (MOS - Free Report) : This Minnesota-based company carries a Zacks Rank #3. It has an expected earnings growth of 24% for the current year and estimated long-term earnings growth rate of 7%. The company delivered an average positive earnings surprise of 7.3% in the trailing four quarters.
Price and Consensus: MOS
CF Industries Holdings, Inc. (CF - Free Report) : Based in Deerfield, IL, the stock currently holds a Zacks Rank #3. It has an expected earnings growth of 68.5% for the current year and estimated long-term earnings growth rate of 6%. The company delivered an average positive earnings surprise of 34% in the trailing four quarters.
Price and Consensus: CF
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