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2 Fertilizer Stocks to Watch Amid Industry Challenges
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The Zacks Fertilizers industry is being plagued by weaker fertilizer prices on demand softness as growers have reduced application rates due to affordability issues. An uptick in the cost of key raw materials partly due to the war in Ukraine has also put pressure on the margins of companies in this space.
However, favorable global agricultural fundamentals and healthy farm economics augur well for the industry. Players in the industry, such as Sociedad Quimica y Minera de Chile S.A. (SQM - 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 Dent Margins: Fertilizer prices surged to historic high levels in the first-half of 2022, riding on the impacts of the Russia-Ukraine war 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 retreated 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 demand destruction. Global nitrogen prices have declined since the beginning of 2023. Higher global supply availability driven by higher global operating rates has resulted in a decline in prices. Lower fertilizer prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Worry: 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 constraints boosted crop commodity prices. Higher freight, energy and labor costs and raw material shortages contributed to the upside. Prices of corn, soybean and wheat rallied to multi-year highs in 2022, partly driven by supply worries stemming from Russia’s invasion of Ukraine and are likely to remain elevated due to lingering concerns over the war. Higher agricultural commodity prices augur well for crop nutrient demand over the near term. Farmer economics also remain attractive in most global growing regions, aided by a spike in crop commodity prices.
Zacks Industry Rank Reflects Downbeat 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 5% 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.
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 18.5% over this period compared with the S&P 500’s rise of 15.6% and the broader sector’s increase of 20.7%.
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 5.53X compared with the S&P 500’s 13.59X and the sector’s 9.31X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.89X, with a median of 13.44X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
2 Fertilizer Stocks to Keep a Close Eye on
Sociedad Quimica: Chile-based Sociedad Quimica produces plant nutrients, iodine, lithium and industrial chemicals. It is benefiting from being the low-cost producer of potassium chloride, potassium sulfate and potassium nitrate. SQM is gaining from favorable trends in the lithium market underpinned by strong electric vehicle sales. Higher demand is also expected to support the company’s lithium sales volumes. Strong demand and limited supply are also supporting lithium prices. Iodine volumes are also being driven by growing demand following the post-pandemic recovery.
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. 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, including HB pipeline, Moab potash cavern and the HB Eddy Shaft, which are expected to drive its production.
Intrepid Potash currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the current year for IPI has been stable over the last 60 days.
Price and Consensus: IPI
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2 Fertilizer Stocks to Watch Amid Industry Challenges
The Zacks Fertilizers industry is being plagued by weaker fertilizer prices on demand softness as growers have reduced application rates due to affordability issues. An uptick in the cost of key raw materials partly due to the war in Ukraine has also put pressure on the margins of companies in this space.
However, favorable global agricultural fundamentals and healthy farm economics augur well for the industry. Players in the industry, such as Sociedad Quimica y Minera de Chile S.A. (SQM - 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 Dent Margins: Fertilizer prices surged to historic high levels in the first-half of 2022, riding on the impacts of the Russia-Ukraine war 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 retreated 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 demand destruction. Global nitrogen prices have declined since the beginning of 2023. Higher global supply availability driven by higher global operating rates has resulted in a decline in prices. Lower fertilizer prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Worry: 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 constraints boosted crop commodity prices. Higher freight, energy and labor costs and raw material shortages contributed to the upside. Prices of corn, soybean and wheat rallied to multi-year highs in 2022, partly driven by supply worries stemming from Russia’s invasion of Ukraine and are likely to remain elevated due to lingering concerns over the war. Higher agricultural commodity prices augur well for crop nutrient demand over the near term. Farmer economics also remain attractive in most global growing regions, aided by a spike in crop commodity prices.
Zacks Industry Rank Reflects Downbeat 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 5% 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.
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 18.5% over this period compared with the S&P 500’s rise of 15.6% and the broader sector’s increase of 20.7%.
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 5.53X compared with the S&P 500’s 13.59X and the sector’s 9.31X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.89X, with a median of 13.44X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
2 Fertilizer Stocks to Keep a Close Eye on
Sociedad Quimica: Chile-based Sociedad Quimica produces plant nutrients, iodine, lithium and industrial chemicals. It is benefiting from being the low-cost producer of potassium chloride, potassium sulfate and potassium nitrate. SQM is gaining from favorable trends in the lithium market underpinned by strong electric vehicle sales. Higher demand is also expected to support the company’s lithium sales volumes. Strong demand and limited supply are also supporting lithium prices. Iodine volumes are also being driven by growing demand following the post-pandemic recovery.
Sociedad Quimica carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current year earnings for SQM has been revised 0.3% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SQM
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. 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, including HB pipeline, Moab potash cavern and the HB Eddy Shaft, which are expected to drive its production.
Intrepid Potash currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the current year for IPI has been stable over the last 60 days.
Price and Consensus: IPI