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Near-Term Outlook for Fertilizers Industry Appears Gloomy

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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 — as well as other nitrogen products to help farmers improve crop yield.

Some of the prominent industry players include The Mosaic Company (MOS - Free Report) and Nutrien Ltd. (NTR - Free Report) .

Let’s take a look at the industry’s three major trends:

  • Weak agricultural commodity prices are hindering the recovery of the fertilizer industry. Prices of major crops such as soybean and corn are at multi-year lows, partly due to a supply glut. Moreover, disruptions associated with the outbreak of coronavirus are likely to hurt demand in China, a top consumer of agricultural commodities, in the short term. The deadly outbreak has exerted pressure on prices of corn and soybean. Weaker expected demand in China due to the impact of coronavirus is likely to put pressure on agricultural commodity prices in the near term, which will affect demand for fertilizers.
  • Prices of phosphate are witnessing a declining trend due to lower demand and higher supply. A third consecutive soft fertilizer application season in North America has affected phosphate prices. In the near term, phosphate prices are expected to be under pressure amid market weakness. Also, prices of potash are being negatively impacted due to weak global demand. However, healthy demand, especially from India, along with tightened global supply is providing support to global nitrogen prices. Tighter demand and supply balance are expected to support nitrogen prices in the near term.
  • Per the U.S. Department of Agriculture’s (USDA) latest outlook, net farm income is projected to rise 3.3% year over year to $96.7 billion in 2020. However, net cash farm income is projected to decline 9% year over year to $109.6 billion this year. Demand for nitrogen is strong in India. Also, lower domestic urea production in Brazil is likely to increase demand this year. Expectations of higher planted corn acres in the United States in 2020 also suggest a pickup in crop nutrient demand in North America. However, phosphate demand in China is witnessing a downtrend and is not expected rebound in the near future.

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 #236, which places it at the bottom 7% 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 17% against the S&P 500’s rise of 22.2% and the broader sector’s decline of 4.1%.

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 6.13X compared with the S&P 500’s 11.36X and the sector’s 9.23X.

In the past five years, the industry has traded as high as 20.89X, as low as 6.04X, with a median of 9.11X, as the chart below shows.

Enterprise Value/EBITDA (EV/EBITDA) Ratio

Enterprise Value/EBITDA (EV/EBITDA) Ratio  

Bottom Line

Agricultural commodity prices are likely to remain soft in the near term, which will impact fertilizers demand. The coronavirus outbreak is also expected to hurt demand in China in the short term and impact crop commodity prices. Moreover, weak global demand and higher supply are exerting pressure on phosphate prices. Also, weak global demand is hurting prices of potash.

Currently, none of the stocks in the Zacks Fertilizers industry sport a Zacks Rank #1 (Strong Buy). We are presenting one stock with a Zacks Rank #2 (Buy) and another stock carrying a Zacks Rank #3 (Hold) that investors may consider. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Scotts Miracle-Gro Company (SMG - Free Report) : The Zacks Consensus Estimate for 2020 earnings for this Marysville, OH-based company has moved up 1.8% in the past 30 days. The company, carrying a Zacks Rank #2, has an estimated earnings growth rate of 14.3% for the current fiscal. It also has an estimated long-term earnings growth rate of 9.9%.
Price and Consensus: SMG

CF Industries Holdings, Inc. (CF - Free Report) : Based in Deerfield, IL, the company currently carries a Zacks Rank #3. It has an expected earnings growth of 2.7% for the current year.  It also has an estimated long-term earnings growth rate of 6%.

Price and Consensus: CF

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