Trying to Defend Mosaic

I did a very shoddy back of envelope analysis yesterday on Mosaic (MOS) in terms of cash flow and the ability to completely buy back all its shares ...

Only 68 more points down for Mosaic before it gets to zero. I think down from 6x earnings to 5, do we hear 4? Looking at their balance sheet last quarter they had $2 Billion in cash/equivalents versus $1.6B in debt - so net $400M. Their cash flow was $1 Billion in 1 quarter alone. With realized prices higher this past quarter than the previous they should generate even more than the $1 B in cash last quarter. This will allow them to reduce their debt significantly and be somewhere around $1.5B cash net of debt. And add at least $1B every quarter after for quite a long time. With a $30B market cap starting in 2009 they should be able to generate $5B in cash a year which in theory means they can buy back 1/6th of the company every year, and by 2015 be private ;)

See, unlike some companies losing 50% of value in one quarter, others actually have tremendous stories and huge cash flow - even if fertilizer prices drop 25% from here the cash flow will be immense. It has not mattered as hedge funds who are levered seem to sell at any price due to redemptions, but if this continues, either buyouts will happen or the companies will declare huge dividends and/or take themselves private. At some point valuation does matter again - there are real businesses out there - these are not just stock symbols for hedge funds to trade in manic nature.

It looks like an analyst agrees with me today (or is an avid blog reader). I keep saying some of these valuations are absurd, but the stocks just keep going down - it is truly amazing. I am now wondering if these companies will soon begin to trade lower then their cash on hand.

Shares of Mosaic Co., the world's largest phosphate producer, jumped Tuesday, a day after a sharp selloff that left analysts relatively upbeat on the company's share price. The stock has lost about half its value since mid June.
On Tuesday, analysts cited the Plymouth, Minn.-based company's attractive valuation. Soleil Securities analyst Mark Gulley estimates that Mosaic generates a robust free cash flow yield of about 16 percent. Free cash flow, or operating cash flow minus capital expenditures, measures a company's ability to generate cash and reward owners. It also is more difficult to manipulate than net income.
Gulley also said that with shares trading at three times the company's earnings before income, taxes, depreciation and amortization, a buyout of the company could be paid for in three years.

Citi Investment Research analyst Brian Yu reiterated his "Buy" rating on the shares and his "positive long-term position on the North American fertilizer market."
I don't have a copy of the report but I am wondering if the statement above means that, if a company bought Mosaic, the cash flow would literally pay for the entire bill in 3 years? Not sure.

Either way, in this new environment cash is king, so despite the relentless selling, we want companies that generate cash like mad - which the fertilizer companies will at this price of their products, or 20-40% lower. Again potash (the nutrient) has not budged one iota (yes, the other two nutrients show some signs of weakening, as some readers have pointed out - but not dropping 50-60% like the stock price).

Again, it is all relative. Much like people are running away from global growth stocks since their growth rates are falling from 60% year over year to potentially 20-30% year over year - that's still not all bad. Especially when they are running into stocks shrinking 15% a year, hoping to once again grow 10% a year.

But that's logic, and we don't use that around here anymore. I will look forward to tomorrow's earnings report and have hopes the company will take steps to defend its stock. Obviously the chart is a disaster and people will be shorting once it rebounds to a resistance level (and true to form we'll have to sell assuming the worst once we hit those levels - since the worst has come to fruition over and over since July 1)

CF Industries Holdings shares tumbling

Big drop in urea prices leads to downgrade of CF Industries Holdings shares, stock plummets

NEW YORK (AP) -- Shares of CF Industries Holdings Inc., which makes nitrogen and phosphate fertilizers, plummeted Friday after an analyst downgraded its shares on concerns that a recent drop in prices for urea, a nitrogen-containing substance, could last into next year.

Citi Investment Research analyst Jonathan Sullivan said in a note that global urea prices fell sharply this week, hurting the Deerfield, Ill.-based company, which gets 64 percent of its profits from selling nitrogen.

"The risk is that urea prices continue to decline as buyers delay their purchases and draw down inventories deeper than usual in anticipation of even lower prices," Sullivan wrote. "The timing and extent of this feedback loop is nearly impossible to predict or quantify, but could take weeks or months to play out."

He downgraded the stock to "Hold" from "Buy" and slashed his price target to $128 from $215, citing "recent weakness in global nitrogen pricing that could last through the end of 2008."

Shares tumbled $18.42, or 16.7 percent, to $91.78.

Shares of nitrogen maker Terra Industries tumble

Shares of nitrogen maker Terra Industries slide as price for urea, a nitrogen product, falls

NEW YORK (AP) -- Shares of Terra Industries Inc., which makes nitrogen for fertilizer and for industrial uses, tumbled Friday after an analyst downgraded its shares on concerns that a recent drop in prices for urea, a nitrogen-containing substance, could last into next year.

Citi Investment Research analyst Brian Yu said in a note that global urea prices fell sharply this week and that the Sioux City, Iowa-based company gets 100 percent of its profits from nitrogen.

"The risk is that urea prices continue to decline as buyers delay their purchases and draw down inventories deeper than usual in anticipation of even lower prices," he said. "The timing and extent of this feedback loop is nearly impossible to predict or quantify, but could take weeks or months to play out."

He also downgraded shares to "Hold" from "Buy" and slashed his price target to $44 from $64, saying "recent weakness in global nitrogen pricing that could last through the end of 2008."

Shares tumbled $7.48, or 19.7 percent, to $30.42.

Agrium shares tumble after price target slashed

'Bear market' leads analyst to slash price target on fertilizer maker Agrium; stock tumbles

NEW YORK (AP) -- An analyst Friday slashed his price target for Agrium Inc. as the fertilizer maker's strong fundamentals succumb to "bear market conditions."
RBC Capital Markets analyst Fai Lee cut his price target to $105 from $145 because of "higher market risk premiums, portfolio rotation due to investor sentiment resulting in a broad sell-off in commodity-related stock and distressed liquidations."

Lee, who has an "Outperform" rating on the stock, cited as "attractive" its free cash flow yield, a metric that gauges cash a company can generate after maintaining or expanding its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value.

The analyst also said the sector's fundamental's are strong, citing high crop prices, low grain inventories and high fertilizer prices.

However, those positive fundamentals are being overwhelmed by "current stock market conditions and change in investor sentiment towards commodity-related stocks," he wrote.

Shares of the Calgary, Alberta-based company plummeted fell $10.85, or 14.5 percent, to $64 as oil, copper and chemical companies all suffered share price declines.

Fertilizers Reeking

The fertilizer industry is heading for the dumps today. The double blow of being downgraded by Citigroup (NYSE: C - News) and RBC Capital is taking its toll, as Agrium (NYSE: AGU - News) has lost 12.73% to trade at $65.32 in the morning. However, the greater impact has been on CF Industries (NYSE: CF - News), which has tumbled by 19.62% while tremors are also being felt at Terra Industries (NYSE: TRA - News), down by 22%.

According to an AP report, a recent drop in urea prices has sent shivers down the ranks of the fertilizer industry. Analysts predict the price weakness could spill into next year. With the broader market in a bear hug over the bailout package turmoil, other agricultural stocks like Monsanto (NYSE: MON - News), Intrepid Potash (NYSE: IPI - News) and Mosaic (NYSE: MOS - News) have absorbed losses the range of 8-10% this morning.

FERTILIZER MAKERS FALL FURTHER AS PRICES PLUNGE

For the sheer velocity and ferocity of its selloff, few groups have suffered as badly since late in the prior quarter as some of the agricultural products makers. It’s a pretty bold statement in the midst of a meltdown of financials, retailers, casinos, as well as - at various times this quarter - sectors like airlines and pharmaceuticals. But the deterioration in the market value of some fertilizer makers would stand out in even sharper relief largely because of the tremendous gains that these names marked in the first six months of the year - gains that, in some cases, have essentially vanished over the course of the last two or three months. Shares of Agrium (AGU), for example, have declined 43% since the mid-June highs. Terra Industries (TRA) has been cut in half since its stock topped out in late July, and is now trading just barely above last October’s lows. CF Industries (CF) has lost 49% of its value since its June 18 best, when shares reached $173. Since then, the stock lost $85 a share. The latest downleg came here Friday, as most names in the sector moved 10% to 20% lower in the session amid concerns about pricing for nitrogen products. According to Citigroup, which lowered its rating on several of the names Friday, the price of urea, a solid nitrogen product, fell 15% in the span of just a week. In the U.S., urea prices slumped to $575 a ton, from $705 a ton last week. Terra, which doesn’t have much direct exposure to urea sales, but could be hobbled if the weakness spreads across the portfolio of nitrogen-based products it makes, has been taken off Citi’s top picks list. The firm said nitrogen buyers have delayed purchases, instead drawing down inventories. Until urea prices stabilize, the stocks are likely to struggle, Citi said.

CF Industries Holdings, Inc.: Zacks Rank Buy

CF Industries Holdings, Inc. (NYSE: CF - News) is operating in a very hot segment of the market but still retains extremely attractive valuations, trading at a steep discount to the overall market. The analyst community is bullish on the long-term prospects of CF, with the next-year estimate projecting 31% earnings growth.
Second-Quarter Results


In spite of the fact that CF's share price is trading down from its recent high above $170, the company second-quarter results, reported in late July, were nothing short of amazing.

Sales were up 37% from last year, to $1.16 billion. Net income totaled $288.6 million, a big jump from last year's $93.6 million. This produced earnings of $4.10 per share, ahead of analyst estimates of $3.56 per share.

Consistent Results

CF has been handily beating analyst estimates over the last four quarters, having done so by an average of 53 cents, or 29%.

CF noted that its sales volume tapered off slightly during the quarter from last year, but this dynamic was offset by significantly higher selling prices.

Representatives from CF also noted that the company expects strong global demand to pressure supplies and keep selling prices high for the remainder of 2008 and into spring of 2009.

Analyst Estimates

In accordance with the excellent quarterly results and bullish language, analysts have been quick to revise their earnings estimates upward. The current-year estimate now stands at $17.41 per share, up from $13.01 per share 90 days ago.

The next-year estimate is very bullish, with the consensus estimate pegged at $22.88 per share, a 31% earnings growth projection.

Valuations

Based upon the current-year estimate, this stock has tremendous value, carrying a forward P/E multiple of 7.1X, a steep discount to the overall market.

The Chart

Shares of CF appear to have found a stabilization point after dropping from the 52-week and all-time high, recently advancing above a short-term level of resistance just above $120. Moving forward, this stock looks well positioned for more gains because CF has been able to consistently deliver big-time earnings gains.

Buy, Sell or Hold: Potash Deserves Another Look

In this column back on Monday, Aug. 4, I wrote about Potash Corp. (POT), advising investors to sell the company’s shares immediately, and to buy them back later in the year, after the outlook for the company’s business became more clear. At the time I said the reasons for taking profits on the stock included:

A sell-off in commodities, affecting grains, driven by a rise in the U.S. dollar by hedge funds that were forced to sell some of their holdings due to redemptions, some demand destruction due to the high fertilizer prices, and the expectations of a temperate summer.

A very real fear that the federal government might scrap the ethanol program early next year, after the elections ended – a move that would decrease fertilizer demand.
And necessary profit-taking by long-term investors who – fearing an increase in the capital gains tax – might wish to re-establish a much higher tax basis in the shares.
On the Friday before the column appeared, Potash shares closed at $201.60. Readers who embraced my analysis were very glad that they did (one reader actually wrote in to say so). By the following Monday – Aug. 11 – the company’s shares closed at $160.91, a decline of 20%.

Potash shares remain well below the $200 level. On Friday, in fact, the stock closed at $175.24 – but only because they’d rocketed $11.74 each, or 7.18%, on that day alone. I’d already changed my view of Potash’s prospects, however.

Today, with the massive liquidation in commodity positions in hedge funds behind us and the risk of higher capital gains taxes abating fast in the middle of a crisis that demands stimulative moves, the current stock-price action reveals that most of the tax selling has also occurred. So we return to fundamentals.

But stock fundamentals got suspended in the markets as systemic risk took over with the threat of a financial collapse threatening to rise out of control. The United States and other governments – as well as their respective central banks – acted both decisively and appropriately in recent weeks, meaning the risk of a systemic meltdown was contained. Further measures are being implemented that not only saved the day, but also are going to allow the U.S. financial system to return to a more-normal operation, which will enable the U.S. economy – and U.S. investors – to start prospering again.

Interestingly, during the crisis Potash has been rising consistently, as investors started going back into commodities. Clearly, the U.S. government’s necessary solution, very similar to those implemented in the successful interventions of many financial systems in other countries, will generate higher expectations of growth.

To add to this, the summer in the United States turned out to be not as benign as expected with crops. Hence, the U.S. Department of Agriculture cut its projections for corn and soybean production. This will keep supplies constrained and will send prices higher.

Staying with the fundamentals, the long-term story of escalating worldwide demand for grains due to the large and sustained growth of real incomes in the emerging markets – especially in China, India and Brazil – remains intact. The price actions in all these markets have been greatly exacerbated by profit-taking and panic selling and all represent superb buying opportunities today. Global growth is not suffering in the way that financial markets would lead you to believe. The effect on the real economies of these countries has so far been minimal.

And Potash is superbly positioned to use its own strong cash flow to reinvest in “the world’s best potash assets – our company – at an attractive price,” William J. “Bill” Doyle, the company’s president and CEO said recently. Less than two weeks ago, Potash launched an aggressive share-repurchase program under which it will buy back as much as 10% of its public float (currently 31.5 million shares) by Jan. 30. At the time this latest buyback plan was announced, it was valued at about $2.36 billion.

This latest buyback plan follows a just-completed buyback plan under which Potash repurchased and retired nearly 16 million shares of its stock.

No doubt, these are compelling reasons to get back into the stock at a much lower valuation. Given last week’s rally, it is advisable not to buy everything at once, but instead to edge into the stock in stages, especially taking advantage of pullbacks.


[Editor’s Note: “Buy, Sell or Hold” is a Money Morning feature that has most recently analyzed such companies as Garmin Ltd. (GRMN), Berkshire Hathaway Inc. (BRK.A), Cisco Systems Inc. (CSCO), Chevron Corp. (CVX), Valero Energy Corp. (VLO), General Electric Co. (GE), and steelmaker Nucor Corp. (NUE).]

Disclosure: Horacio Marquez holds no interest in Potash Corp

Cycles Lead to Buying Opportunities

When legendary investor Bernard Baruch was asked to describe the stock market, he replied that he was sure of one thing: "It will fluctuate." Baruch's remark is the only bit of certainty regarding the stock market, and it's no less true for the various industries that make up the business environment.

Basic economics
All industries and businesses follow the same basic laws of supply and demand. This concept has never changed and never will, and the cycle is quite clear.

During periods of high demand, high capacity utilization, and increasing operating margins, businesses begin implementing steps to meet the demand. The result usually includes new plant investment, increased product pricing, and increased production -- until supply exceeds demand. Then prices decline, less capacity gets used, and margins shrink. This period continues until -- you guessed it -- the available supply is outstripped by demand, at which point the cycle starts all over again.

For sale by owner
The homebuilding industry, for instance, offers a near-perfect example of this cycle playing out. After the tech bubble (a cycle in itself), the economy became a low-interest rate environment, making access to capital very easy and cheap. Demand for housing grew rapidly. First-time homebuyers found it more manageable to assume loans and newly minted real-estate speculators used the flow of cheap money to "flip" homes. Homebuilders responded by turning out more homes and acquiring land lots at a blistering pace. For years, all was well.

Of course, the clock had to strike midnight sometime. The increased housing production ultimately exceeded demand, and homebuilders like Centex (NYSE: CTX), Toll Brothers (NYSE: TOL) and Pulte Homes (NYSE: PHM) now command a fraction of the market values they enjoyed in rosier times. No matter how fine these companies' management teams might be, with supply exceeding demand, it's not difficult to see why these firms have been battered.

The farmer's turn
The same situation has playing out with just about anyone involved in agriculture these days, but with a far brighter picture for players in this industry. For years, supply outstripped demand. But now, thanks to several factors including demand for ethanol and the rise of the middle class in China, agriculture products are in great demand. This boon has also created unbelievable profits for fertilizer companies. Shareholders in Monsanto (NYSE: MON), Mosaic (NYSE: MOS), Potash Corp. (NYSE: POT), and CF Industries (NYSE: CF) have reaped amazing harvests as a result.

The key takeaway
An old proverb says "What has risen shall one day fall, and what is fallen shall again rise." Should investors concentrate their efforts on trying to time such cycles? Not at all, Fools -- that's a sucker's game. However, I do think that it's exceedingly important to understand the industries you're invested in, to reduce the chance that you'll make your investments at inopportune times. As investors, we are attempting to buy low and sell high, but this should not be confused with attempting to buy at the bottom and sell at the top. Buying at the bottom and selling at the top is an element of good fortune that will periodically come when investors focus on buying underpriced businesses and selling overpriced ones.

Something Rotten in the State of Fertilizer?

It was a wild and whacky week. Merrill Lynch and Lehman Brothers, two icons from the world of investment banking, are gone or soon will be. Further, the Feds have to some degree nationalized financial services, and the equities markets have bounced around like a cork in a storm.

So you're to be excused if you missed the news that lawsuits alleging price fixing and collusion have been filed against several fertilizer companies, including Potash Corp. (NYSE: POT), along with Mosaic (NYSE: MOS), and Agrium (NYSE: AGU). The suits, which were filed by two Midwest-based farm chemical and fertilizer suppliers, seek class action status.

In just the past couple of years, the price of phosphate, an important fertilizer ingredient, has nearly tripled, while a ton of potash, also a key fertilizer component, has increased by an even greater amount. Beyond that, it seems that there are a couple of key aspects to understanding the lawsuits and their potential outcome:

Because of a 1918 measure called the Webb-Pomerene Act, phosphate makers are permitted to pass among themselves information that in other industries would set off antitrust sirens.
At the behest of Sen. Byron Dorgan, D-N.D., the Federal Trade Commission earlier this year looked into the possibility of antitrust violations within the fertilizer industry. The resulting FTC look-see found no evidence of collusion among the companies.
I have no intention of being cavalier in regard to potential industry collusion, because nobody can yet know what's really going on in fertilizer component pricing. But for lots of reasons that probably should be readily apparent, the world of agriculture has virtually exploded in the recent past, positively affecting such companies as DuPont (NYSE: DD), Monsanto (NYSE: MON), and Deere (NYSE: DE).

Unless I learn otherwise, however, I'm not going to lapse into lather about shenanigans related to fertilizer pricing. Indeed, because the global world of agriculture must expand steadily and substantially in the years to come, I would simply offer that this is a sector deserving of ongoing Foolish attention

CF Industries a Good Value

CF Industries Holdings, Inc. (NYSE: CF - News) spiked around 3.8% in the morning to trade at $113.80. High domestic and international demand has resulted in fertilizer prices shooting up globally. With a P/E ratio of 10.4, the stock is in the value territory.

A target price of $130 means the stock has some upside, and analysts have raised the company's EPS estimate for the year by $4.40 to $17.41 over the last three months. The company has consistently sprung earnings surprises in the last four quarters at an average of 28.73%..zacks.com

CNH Global's Upward Potential

CNH Global N.V. (NYSE: CNH - News) is trading at $28.85, holding up nicely above the $28.50 mark. The stock has an attractive forward P/E of 6.67, which means that it is safe with ample growth potential as reflected in its PEG [price-to-earnings-growth] ratio of 0.43.

Both the above-mentioned P/E and PEG stats are better than the construction-equipment maker industry benchmark, which was rocked last week after Terex Corp. (NYSE: TEX - News) cut its earnings forecast for 2008. CNH's stock value had also plunged after the announcement.

In spite of the drop, CNH still has an upside potential of 0.56% for 2008 with the Average Target Price of $48.17. After a 26.50% surprise in the last earnings report, analysts have raised the stock's annual EPS forecast over the last two months by 20 cents to $3.55.

CF Industries Keeps It Growing

CF Industries Holdings, Inc. (NYSE: CF - News) has leading market shares in many key fertilizers. Strong domestic and international grain markets have produced an exceptionally high global demand for fertilizer, translating into substantially higher selling prices for all the products.

The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the U.S. This is likely to lead to higher prices and cash margins for various fertilizers.

In addition, the company is likely to benefit from the proposed nitrogen facility in Peru, which will address the nitrogen demand on the west coast of Central and South America as well as Mexico, which does not have a nitrogen facility. As a result, we rate the shares a Buy with a target of $130.

On July 28, CF Industries Holdings reported net earnings of $5.02 per diluted share for the second quarter of 2008 versus $1.65 for the same quarter a year ago. The sharp increase was primarily driven by higher nitrogen and phosphate prices. Net sales totaled $1.16 billion, up 37% from the year-earlier quarter.

Water: An Ocean of Opportunity

The Dow is bouncing up and down like a yo-yo. Every chart looks like a ski slope. A few investors are profiting from these wild market mood swings, while others are seeking refuge in industries that feature non-discretionary items, like water.

Approximately 40% of the world population lacks adequate fresh water. In the next decade an estimated $800 billion is going to be spent globally to bring fresh water to those who don’t have it. With that kind of money flowing into a sector, you can bet now is the time to start paying attention to water.

Water stress is severe in China, India, and Africa, and it’s also rising in developed nations. Sure there are infrastructure issues, but one of the biggest problems is simply a lack of water. Most of the earth’s surface is water, but less than 3% is drinkable.

The world’s freshwater resources are not sufficient to keep up with demand. As the world population grows and water tables decline, a solution has to be developed. Right now, that solution is desalination.

Desalination (removing the salt from ocean water) is a technology that is gaining momentum as a practical solution to the global water shortage.

This isn’t some hippy green-energy pipe dream that’s 20 years away from having a meaningful impact on the world. The National Academy of Sciences declared, “Desalination is a realistic option for increasing water supplies.”



Desalination is viable. In fact, there are currently more than 1,200 desalination plants separating salt and water in the world. Many of them are in the Middle East, but they are also in Europe and Japan. There are even a few in the United States. Las Vegas and San Diego are preparing for an inevitable water shortage and are already considering building desalination plants.

Right now, about 99% of fresh water comes from rivers, lakes, and reservoirs. The other 1% comes from desalination. Desalination creates 11 billion gallons of drinkable water per day. That’s enough to fill 18,000 Olympic-sized swimming pools, but it’s still only 1% of water used in the world.

That’s all starting to change. The beauty of desalination is that there will never be any shortage of raw product. So expansion is only limited to the amount of infrastructure. There is currently a 45% increase in desalination capacity set to come on line in the next seven years. That’s an addition of five billion gallons per day.

With something as important as water and hundreds of billions of dollars up for grabs, you can bet a lot of big companies are chasing after it. In the past few years most of the companies developing desalination technology have been gobbled up by big conglomerates, but not all of them.

For instance, General Electric (GE) is heavily involved in desalination technology. In the last eight years, the conglomerate bought out many of the smaller players. GE has bought an expertise by picking up smaller players like membrane builder, Zenon Environmental. Other big companies like Veolia (VE), Dow Chemical (DOW) and DuPont (DD) have also been moving into desalination.

There a number of construction companies who have created a healthy niche building desalination plants. These include Spanish companies, Acciona (ACXIF.PK) and Abengoa (ABGOF.PK), Italian builders Impreglio (IPGOF.PK) and a South Korean company called Doosan (DOHIF.PK).

Although U.S.-based “pure plays” are not easy to find, there are some companies poised to do well from the desalination boom.

Energy Recovery (ERII) is a good example. It makes seawater desalination products. Energy Recovery is exploiting one of the major drawbacks of the desalination process, energy consumption. Its leading product is the PX Pressure Exchanger which is a specialized pump that recovers energy from the desalination processes.

Energy Recovery did $45 million in sales last year. It has a very healthy operating margin for a manufacturing company of 26% and its revenues are growing at a triple-digit rate. Most encouragingly, the company just signed a contract with China’s largest desalination plant, the Tianjin Dagang Plant. Tianjin Dagang will produce about 26 million gallons of water a day.

China is expected to spend about $200 billion on water infrastructure in the next decade. You can bet there will be plenty more desalination plants like Tianjin popping up.

Energy Recovery is proving to be a great example for the rest of us. It sees where the action is and has already started to make its move into one of the highest growth markets for water infrastructure in the world.

In sum, the world needs more drinkable water. China has $200 billion earmarked for it. The rest of the world has an additional $600 billion set aside to build the systems necessary to get water to consumers. Global spending on desalination is set to more than double in four years.

Most importantly and what has attracted our attention at the Prosperity Dispatch, more water is a need. Traders and pundits can speculate all day which bank the Fed will bail out next, but they’ll never know for sure. When it comes to water, we pretty much know governments will spend any amount necessary.

CF Industries, Terra: Earnings Concerns Misplaced

CF Industries (CF) and Terra Industries (TRA) are fertilizer companies with multi billion dollar market caps, but much smaller than the better known names in the industry, such as Mosaic (MOS) and Potash Corp. (POT). CF manufactures nitrogen and potash based fertilizers, while TRA is primarily a nitrogen based manufacturer.

Fertilizer companies have seen their earnings soar in recent years, and there is concern that the good times are about to end. I think this concern is misplaced, and that earnings should continue to be robust.

On the demand side, there is no let-up in the shifting of diets in large parts of the world towards meat, which requires feed in the form of corn and soybeans. Corn-based ethanol has also been a driver, with the high price of oil and the focus on renewables.

The major raw material input in the making of nitrogen based fertilizers is natural gas, whose price has come down substantially in the last few months. Also, there have been major discoveries of natural gas deposits in the continental US in shale rock. There have been a lot of news reports devoted to the Fayetteville, Marcellus, and Haynesville shale plays. These assure an increasing supply of natural gas at reasonable prices in the United States. Natural gas is hard to transport and expensive to store. Thus, these increasing supplies are likely to be beneficial to US based users like CF and TRA.

Both companies have no net debt, and in fact, CF has $20 of net cash per share. At the recent stock price of $39 for TRA and $110 for CF, they are trading at 6-7x '08 EPS. Free cash flow generation is tracking earnings, and so the FCF multiple is also in the high single digits. TRA is buying back stock, while CF is hoarding its cash right now.

On the flip side, CF is more diversified. I think there is about 80% upside in both stocks. The stocks, however, are quite volatile and not for the faint of heart. They tend to move in tandem with the commodity complex, which has exhibited a lot of volatility (along with a downward trend) of late.

One interesting aside is that the stock prices of these companies are positively correlated with the price of natural gas. One would logically expect a negative correlation as natural gas is a major input. It looks like investors move in and out of all commodities and commodity related stocks at the same time.

Fair value for CF stock: $200 (12x multiple on '08 EPS of $16.40)

Fair value for TRA stock: $73 (11x multiple on ‘08 EPS of $6.63)

Canaccord Adams Analyst: Attractive Entry Point for Potash Corp

Canaccord Adams has reiterated its Street-high C$425 price target on shares of Potash Corp. of Saskatchewan (POT) after the fertilizer giant announced that its board of directors has approved an increase to its share buyback program. The company hiked the ceiling from 5% to roughly 10% of the public float.

In a research note, Canaccord analyst Keith Carpenter said:

Potash Corp. is taking advantage of the recent market downturn to re-invest its cash at depressed prices. The increased buyback underscores the company’s long-term potential and continued strength for the fertilizer market.

While acknowledging that Potash shares will likely remain volatile and trade in line with general market sentiment in the near term, Mr. Carpenter said the current price presents an attractive entry point.

He said:

We continue to believe that the company’s growth profile and earnings will be unmatched by its peers.

Potash Corp. Stock Undervalued

Potash Corp. of Saskatchewan’s (POT) decision to increase its share buyback program to as much as 10% of the public float, or 31.5 million common shares, means it can repurchase another 15.7 million, or 5%, by the end of January 2009. CEO Bill Doyle said strong cash flows allow the company to re-invest in the world’s best potash assets – PotashCorp. itself, calling the stock “significantly undervalued versus our long-term potential.”

Citigroup analyst Brain Yu agrees, calling the recent sell-off in materials “indiscriminate” and noting that Potash is trading at its lowest multiple in its public history. He reiterated his “buy” and “top pick” ratings for the stock along with a $264 price target that implies upside of roughly 75%.

In a research note, the analyst said:

While we understand the demand linkage between industrial metals and global economic growth, our recent analysis of nearly four decades of global grain demand data indicates that grain demand has rarely declined year-over-year absent a major supply shortfall.

Mr. Yu noted that global grain inventories that now stand at 16.6%, or 8.6 weeks, leave little room for further downdown. He said that if grain prices fall materially, farmers should buy less fertilizers. At the same time, grain production may also decline on an annual basis, which implies that inventories fall and prices could then climb back to elevated levels.

Analyst Actions: Arch Coal, Potash

CITIGROUP REITERATES BUY, TOP-PICK ON POTASH

Citigroup analyst Brian Yu says Potash Corp. of Saskatchewan (POT) had repurchased a total of 10.9 million shares at the end of the second quarter, meaning nearly 5 million have been purchased so far in the third quarter.

Yu says management thinks the current stock price significantly undervalues the company's long-term potential. He notes the global economic situation, but says his recent analysis of nearly four decades of global grain demand data indicates that grain demand has rarely declined year-over-year absent a major supply shortfall.

He sees EPS of $13.00 for 2008 and $22.25 for 2009. He notes the recent sell off leaves POT shares trading at the lowest multiple in its public history. He has a $264 target price.

Stick with Commodity-Based Plays

Investors looking to strengthen their portfolios can do much worse than picking up holdings in choice commodity-based companies. We have chosen to consider some companies outside the oil, gas, gold and coal industries with Zacks senior equities analyst Paul Raman, CFA.

What's one of your top commodity-driven Buy recommendations at this time?

Potash Corp. of Saskatchewan (NYSE: POT - News) is the world's leading producer of potash and the world's largest fertilizer producer. The company has benefited from higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. Rising fertilizers prices, especially potash will expand POT's margin in the second half of 2008 and 2009.

Aren't costs rising for this company as well, however?

The company's manufacturing plants are located in low-cost areas and its financials are solid. Also, Potash Corporation enjoys significant cost advantage with regard to raw materials. All potash produced by the company is in Saskatchewan, where extensive potash deposits are found.

Moreover, the company has lower-cost nitrogen operations in Trinidad due to the long-term, lower-cost gas contracts with Natural Gas Company of Trinidad and Tobago Limited. Further, in response to the rising prices of potash products, the company is expanding and developing projects to raise annual operational capacity to capture a significant share of the growth in global demand.

How have you calculated the worth of POT shares?

Currently, the stock is trading at 10.6x our 2008 estimate of $13.23. We rate the stock a Buy with a target price of $200.00. This is 15.1x our 2008 estimate.

Potash announced that on September 5 it purchased 500,000 of its outstanding common shares following a private agreement between itself and a third-party. The company stated that the purchase brings the total number of shares purchased under its 15.82 million share repurchase program, to 15.15 million shares.

Where else do you see an attractive commodity-based stock?

Rising prices and strong demand are pushing Cleveland Cliffs' (NYSE: CLF - News) performance. Robust industrial growth in China and India has triggered demand for steel, resulting in higher demand for iron ore. The company's portfolio of established and recent iron ore and metallurgical coal assets positions it to capitalize on global industry dynamics in 2008 and beyond.

Moreover, the merger with Alpha will help Cliffs to meet the increasing global demand for coal, consolidate the supplier base, and generate substantial free cash flow. We also believe the strong commodity price regime should significantly boost revenues for Cliffs. As a result, we rate the shares a Buy with a target of $85.00.

Very interesting. Any other commodity plays worth noting?

United States Steel Corporation (NYSE: X - News) remains a leading steel manufacturer in the U.S. The company's near-term profitability is expected to be strong due to higher flat-rolled contract prices and relatively low costs due to backward integration. U.S. Steel also has strong cash flow. These factors lead us to rate the stock to a Buy with a six-month target price of $150.00. .zacks.com

Agrium Attractively Valued

Agrium, Inc. (NYSE: AGU - News) shot up by 6.2% to trade at $78.78, veering close to its 200-day Moving Average of $79.06. Although a sell-off in commodities has severely punished the stock since June, AGU has sprung earnings positives in three of the last four quarters, driven by rising fertilizer prices globally. Agrium's second-quarter profit swelled to a record $636 million while net sales surged by 90%.

Currently, the stock is in the value territory with a forward multiple of only 5.82. Taking into account the company's solid fundamentals and results, analysts have revised their guidance on the stock's earnings estimate for the year by $2 over the last three months. This view found support from AGU CEO Mike Wilson, who in an interview to Bloomberg, revealed that he has increased his stake in the company by 13% to cash in on the rising global demand for grains and agriculture products.

This comes in the wake of the company's announcement of the issue and sell of $500-million aggregate principal amount of 6.75% debentures due January 15, 2019. The proceeds will be used to repay the borrowing made to fund the acquisition of UAP Holding Corp.

Monsanto Makes Half a Discovery

New DNA sequencing technology from companies like Illumina (Nasdaq: ILMN) and Applied Biosystems has revolutionized the development of drugs. Now this technology is also helping to increase farmers' crop yields.

Yesterday, Monsanto (NYSE: MON) announced that it had sequenced the DNA of one of its "top-performing elite" lines of corn. By comparing the DNA sequence of that line to the draft public sequence completed in February, Monsanto can figure out which genes are responsible for the elite production.

The discoveries could be a mixed bag for fertilizer producers such as Mosaic (NYSE: MOS) or PotashCorp (NYSE: POT). Discovering genes that help the corn to grow with less fertilizer could hurt those companies. But if Monsanto is able to develop corn that grows under less-than-ideal conditions, the total area on which farmers plant could increase, driving up sales of fertilizer and other agricultural products like tractors from Deere (NYSE: DE).

While the discovery is exciting, what Monsanto really needs is two different, fully sequenced corn lines. Then it'll be able to combine the best traits from the two lines to create a "super-top-performing elite" line. And then it can sequence another and combine more traits to create a "fantastic super-top-performing elite" line. And so on, until it eventually runs out of adjectives.

All kidding aside, Monsanto has a goal of doubling yields from 2000 to 2030. With modern biotechnology, I have no doubt that its goal is attainable. The big question is whether it'll be able to beat rivals Syngenta (NYSE: SYT), BASF, and DuPont (NYSE: DD) to market. Making discoveries like these quickly should help Monsanto develop its intellectual property moat.

CROP REPORT GIVES AG COMMODITIES LIFT

Shares of several makers of fertilizers and other agricultural commodities scored impressive gains in the session following a mixed reading on crop conditions from the government. The U.S. Department of Agriculture’s August crop report showed that experts continued to expect a robust harvest of corn and soybeans this year, though not quite as fulsome an output as had been suggested in the prior month’s report. Because of slightly drier weather than had been suggested in the July reading, both the corn and soy harvests are going to be slightly below the levels indicated in last month’s report. While a smaller harvest suggested scaled-back demand for fertilizers, those agricultural commodities makers generally are more dependent on how flush farmers are feeling then on simple exposure to the crops in the field. Besides, even with a modest pullback, 2008 is expected to be the second-largest crop on record. Corn and soy prices have both moved higher in futures trading. As a result, shares of Potash (POT) shot up 7% Friday, Agrium (AGU) also increased 7%, and Mosiac (MOS) increased 8%.

Potash producers, suppliers sued for alleged price fixing

NEW YORK, Sept 12 (Reuters) - Potash Corp of Saskatchewan (POT.TO: Quote, Profile, Research, Stock Buzz), Mosaic Co (MOS.N: Quote, Profile, Research, Stock Buzz), Agrium Inc (AGU.TO: Quote, Profile, Research, Stock Buzz) are among a host of potash producers and suppliers that have been sued by a Minnesota fertilizer maker, alleging price-fixing schemes by the companies.

The suit, filed on Thursday by Minn-Chem Inc, alleges that potash producers and suppliers have since 2003 conspired to fix, raise, maintain and stabilize the price of the crop nutrient in the United States at artificially inflated and anti-competitive levels.

Potash producers across the globe have reaped bumper profits in recent months as potash prices have more than quadrupled over the last year, due to growing demand and tight supply conditions. Potash is a key crop nutrient used by farmers across the globe.

China, which is one of the world's largest potash importers is currently paying about $650 to $670 per tonne for potash, but China is likely to have to pay $1,000 per tonne or more for next years imports, according to industry experts.

Minn-Chem also accuses Uralkali (URKA.MM: Quote, Profile, Research, Stock Buzz) (URKAq.L: Quote, Profile, Research, Stock Buzz), Silvinit SILV.RTS, Belaruskali, Belarusian Potash Co (BPC) and International Potash Co (IPC) of being a part of the conspiracy.

BPC is the potash export arm of Uralkali and Belaruskali, while IPC is Silvinit's export arm. Potash Corp, Mosaic and Agrium have their own export arm called Canpotex. However, Canpotex does not supply U.S. demand and has not been named as a defendant in the lawsuit.

Simultaneously, a similar lawsuit was filed by Gage's Fertilizer & Grain Inc, naming the same set of defendants and has been filed in the United States District Court, Northern District of Illinois.

Potash Corp has declined to comment on the Minn-Chem suit, while Agrium said it is in the process of reviewing the allegations, but it believes that the allegations lack merit.

Is Fertilizer Starting to Stink?

If you were Rip Van Winkle (or in a coma) and had looked at the stock price of Potash Corp of Saskatchewan (NYSE:POT) before you fell asleep on January 1 of this year, and then stretched your legs and checked the papers Wednesday, you wouldn't think there was much to this stock. Not much growth, no real action, nothing to see here. But of course, that wouldn't be the whole story, because while you were sleeping, you missed a hell of a ride.

Back in March, I wrote about the fertilizer market with its skyrocketing potash prices and crazy-high P/E ratios - with a nod to some pretty heavy volatility. Here's a little snapshot of the numbers from back then:

Agrium
Potash
Mosaic

Market Cap ($B)
10.3
50.52
45.62

P/E (ttm)
20.14
47.05
48.31

EPS (ttm)
3.24
3.403
2.13




Here's what those numbers look like today:

Agrium
Potash
Mosaic

Market Cap ($B)
10.9
43.1
35.5

P/E (ttm)
10.07
21.97
17.10

EPS (ttm)
6.86
6.44
4.67




What happened?

As predicted, Potash Corp has reported some tremendous profits. The second quarter alone saw its earnings go up 220% - $905.1 million vs. $285.7 million the year before. As we suspected back in March, this was because they were able to lock in high prices, while there was increased demand due to larger crop plantings.

Globally, the fertilizer market remains concentrated and tight; in other words, a market ripe for rising prices. The largest potash-producing countries are Canada, Russia, Belarus and Germany. China has some of its own resources, but may face a shortage of up to 25% of its potash needs for this year and is looking to lock in contracts before any further price increases occur. Both China and Russia have implemented export tariffs to try and keep much-needed fertilizer products at home for domestic use.

Since January 1, Potash Corp.'s stock ran for almost double, from $120.24 on January 17 to $239.50 on June 17 - a price it was unable to sustain, and at a P/E ratio way ahead of most boom-boom tech stocks. Competitor Mosaic (NYSE:MOS) also doubled its stock price - going from $80.02 on January 18 to $161.08 on June 17.

No coincidence. Both stocks were running as hot knockoff agricultural commodity plays. But P/E ratios have come down by half all over the commodities markets, and the potash business has been no exception.

But there's more going on here than just the revaluation we saw in other commodity equity markets like coal, especially with regard to what happened in August. We tend not to spend a lot of time worrying about Canadian labor disputes down here in the U.S., but in this case, we do so to our peril.

In early August, close to 500 United Steelworkers union members walked off the job at three Potash Corp. mines after contract negotiations broke down. The workers had been without a contract since April. As of Monday, there weren't any talks scheduled between the union and the company. Potash Corp. has plans to increase capacity at their mines by 76% by 2012, and is still expecting to go forward with those expansion plans. Of course, increasing capacity without actual miners to turn that into capacity utilization ...

As of now, Potash has managed to start up one of the mines, at least in a limited fashion. While the strike has affected deliveries of the mineral to Potash Corp.'s industrial customers, farming season demand has yet to hit - look for headlines to scream of a potash shortage, and spot prices to rise, if the strike continues on into October. (That all could be good news for Mosaic, of course, which is the key competitor in terms of potash production.)

Many analysts are looking for a Potash comeback. Not a hard call, looking at the volatility of the stock, but it's difficult to say how much of the current drop is really about the event - the strike - and how much is a real reassessment of value of these old-economy stalwarts to a more stately P/E - say, one under 20, more in line with the historical norm for natural resources extractors.

Business Week/Standard & Poor's suggests that Potash Corp. is a strong buy, believing that high earnings per share will continue into 2009: higher potash prices, increasing fertilizer demand due to population growth, and increasing crop plantings. Morgan Stanley takes things a bit further, stating that this latest stock price slump of "Ag Names" is "unfounded."

My call? I'm not so sure. These companies are intrinsically tied to agricultural commodities, and with the recent slump in commodity prices, they could not hope to escape the bloodbath. Yes, prices will probably stay high, demand will remain strong and earnings will be great. But ultimately, how much of that is priced in, with P/Es back at historical norms?

It's like Arch Coal all over again.

Joy Global: Waiting for Hedge Funds to Finish Dumping

Thanks to a reader for pointing out this Joy Global (JOYG) news. My first thought was "yeh but are hedge funds done selling it?" - that's how bad this market has become. News has not mattered. Now again, stock buybacks don't mean anything unless they are followed up on - many companies "announce the setting aside of money for buybacks" but never follow up. But this one appears to be "real", and takes out $1B of a $5B company by the end of 2008. That means earnings PER share increases by 1/5th (does that matter in this market? Who knows anymore) This is exactly why we bought Alliance Data Systems (ADS) - which has been steadfast in a ratty market - a huge buyback.

Joy Global Inc., which makes heavy equipment for the mining industry, said Wednesday its board increased its share repurchase program by $1 billion to $2 billion.
The board also extended the buyback plan's expiration to the end of 2011, from the end of 2008.
Joy Global, which had roughly 107.8 million shares outstanding as of Aug. 29, said it plans to buyback shares under the first $1 billion authorization before the end of the year.
But this fits into a thesis I've been pushing out the past week or two. Unlike financials which no one seems to want to buy (except pundits) these companies have real assets of value and real earnings. At some price point I expect merger and acquisition activity and/or these type of buybacks. This is quite an enormous one since it saps up so much stock, but we know Potash (POT) CEO Bill Doyle has been in there buying stock all year even at these "bubble prices".

Remember folks, these companies are still growing and many have products that are scarce... in the medium to long run (i.e. longer than 99% of hedge funds time frame I assume) population growth and industrialization does not go away. Why these stocks get 5 PE ratios when lousy American retailers get 20 PE ratios is simply marking hedge fund dominance. [Do Earnings Matter?] If you can stand the pain of potentially losing 20% in the next 24 hours when hedge funds liquidate these remain excellent buys. Or if the hedge funds simply liquidate to no end, the companies will buy back their stock like Joy Global is doing, or larger companies will start eating smaller companies. Because unlike banks full of "financial innovations" which are near worthless, these have true hard assets that are worth something in the "real world" as opposed to only in New York City and London.

This news makes me want to buy Joy Global, but I fear another rash of hedge fund selling. I don't know if they are done or not. Maybe they are. Maybe they are not. No one knows. That's the problem. But this puts Joy Global back on my radar as a potential buy in the near future. Falling steel prices should actually help, not hurt this type of company - same with petroleum products which go into so many input costs for these manufacturers. Instead the companies are all traded as if they are oil itself. Nonsensical.

For a company like Potash, I've said once their hyper growth stage is over they are going to turn into a cash cow machine - spinning off dividends left and right as I truly believe even when their new supply comes on in 2011! (not next year, not the year after) there will still be a heightened demand for potash and new higher level of prices. Not that it matters to institutional money whose time frame is "next week at the longest". But by then it might be private the way the stock is getting trashed.

Folks, right now the stock market is like a video game where fundamentals mean nothing. At some point fundamentals will again matter - but it appears not until all these levered hedge funds are unmasked and neutered. There are many companies out there with excellent businesses and high cash flows. In the end they will win. We just need to have cash available to buy them, whenever the relentless selloff and develerging is complete. For now I remain mostly on the sideline because each day brings completely random action.

Agrium Incorporated: Zacks Rank Buy

Agrium's stock has been getting beaten up recently in the commodities sell-off but its earnings have been shining. Agrium has surprised on estimates 3 out of the last 4 quarters by an average of 57.04% as fertilizer prices have soared.
Fertilizer prices continue to remain high making Agrium, with a forward P/E of only 5.82, an attractive value stock.

Company Description

Agrium Inc. (NYSE: AGU - News) produces and sells agriculture products in North and South America.


Headquartered in Calgary, Alberta, the company is the largest direct-to-grower agricultural retailer in the United States. AGU also supplies materials to the industrial sector which produces goods such as mining explosives, household products, pulp and paper and fiberboard.

Agrium has three segments. The Wholesale segment produces and distributes fertilizers, including nitrogen, phosphate and potash, as well as micronutrients from 12 production facilities in North America and Argentina.

The company produces ten million tonnes of fertilizer products annually, including about 6.1 million tonnes of nitrogen, 2.1 million tonnes of potash and 1.3 million tonnes of phosphate.

Approximately 15% of Agrium's Wholesale sales are to the industrial market, which uses the same ingredients as farmers in many of its products.

The Retail segment sells seed, fertilizers and crop protection chemicals and services from 500 retail centers in the United States, Argentina and Chile.

The Advanced Technologies segment produces controlled-release nutrients, micronutrients and plant protection products to agriculture, professional turf and ornamental markets in North America.

Impact of Potash of Saskatchewan's Strike

500 miners are currently striking at 3 of Potash of Saskatchewan's (NYSE: POT - News) mines in Canada. The strike began on Aug 7 and, from press reports, looks no closer to being settled as there are no contract talks planned. The 3 mines produce 30% of Potash's potash production.

Why should Agrium investors care about a competitor's strike? Because the tight market is about to get even tighter.

About 5% of Potash's customers are industrial, as compared with 15% of Agrium's. Already, Potash has put its industrial customers on allocation due to supply shortages. If the strike continues, farming customers may also soon see allocation.

Prices of phosphates and potash for industrial usage has soared. It's unclear to what extent Agrium is benefiting from the supply shortage- in terms of being able to raise its own prices on these products.

The longer this strike continues, the more price pressure there will be on potash. Stay tuned to see if Agrium can use this to its advantage in the third and fourth quarter.

Agrium Easily Beats Wall Street Estimates for the Second Quarter

Soaring fertilizer prices have boosted Agrium's earnings throughout 2008. The second quarter was no exception.

On Aug 6, Agrium reported second quarter earnings that surprised on estimates by 28.21%. Net income more than doubled to $636 million, or $4.00 per share, from $229 million, or $1.70 per share a year ago. Analysts expected $3.12, despite increasing estimates throughout the quarter.

Sales rose sharply in each of the company's segments. Retail saw sales of $2.506 billion compared to $1.147 billion a year ago. Wholesale's sales grew 57% to $1.397 billion compared to $890 million in the second quarter of 2007. Advanced Technologies', the smallest segment, saw sales rise to $107 from $81 million in the year ago period.

Agrium is Bullish About the Rest of the Year

Given the strong quarterly earnings for the first two quarters, the company is optimistic going into the second half of the year.

'We anticipate continued strong demand for our products and services that help farmers around the world improve both crop quality and yield,' said Mike Wilson, President and CEO.

'Specifically, the outlook for the second half of the year remains solid with corn, wheat and soybean prices at two to three times historic levels. This should support crop input demand and continued strength in the nutrient markets benefiting our Retail, Wholesale and Advanced Technologies businesses,' he said.

The company will provide full year earnings guidance when it releases its third quarter earnings on Nov 6.

Consensus Estimates Continue to Rise

Despite the commodities sell-off and the stock's decline, covering analysts continue to be bullish about Agrium's third quarter and full year earnings. Consensus estimates for the third quarter are up 7 cents in just the last week to $1.65 from $1.58. Estimates were at $1.31 only 90 days ago.

Full year estimates also continue to move higher, up 11 cents to $9.34 from $9.23 in the last month.

Value Fundamentals

Agrium was an attractive value stock even before the recent stock sell-off. Now, the company is trading with a forward P/E of only 5.82. Its price-to-book is 2.71. The company has an outstanding 5 year average return on equity (ROE) of 24.33%.

AGU also pays a small dividend. Its current yield is 0.10%.

Growing Agricultural Stocks

The agricultural world has been split into two warring factions: food versus fuel. The end result of this battle is an escalation of agricultural prices called agflation. Increasing global populations and food shortages/hoarding are only compounding the issue. (For more on the food-fuel war, read The Biofuels Debate Heats Up.)

Increasing prices due to supply and demand for agricultural products can be a boon for farmers who can now sell each bushel of grain and drop of milk for a higher price, but farms are also hit with the higher cost of commodities. From feed for their livestock to fuel for their machines, farmers are feeling the pinch. This is why it is even more important to obtain efficient, cost effective equipment and to streamline production. As investors we can enter positions in agricultural related companies as a "picks and shovels" play to gain exposure to this industry's needs.

The rationale is that farmers will need the best seeds, fertilizers, animal feed and other agricultural inputs in hopes of producing the largest yields possible. Therefore, the companies that are selling to the farmers should be in for a decent payday as well.

Monsanto
Missouri based-Monsanto makes a wide range of agricultural products including genetically engineered seeds and herbicide. And although I'm not a farmer by any stretch, even I've heard of Monsanto's Roundup weed killer. The seeds are developed with biotechnology traits which control production, weeds and insects. There has been some debate over the use of these genetically-modified crops, but this article is about the company and the stock. In short, the company sells things that help end users get the most out of their plants. (For more on this industry, check out The Industry Handbook: Biotechnology.)

Monsanto is coming off a decent third quarter where it earned $811 million or earnings per share (EPS) of $1.45. That was up sharply from the $570 million, or $1.02 per share, it turned in during the comparable period last year. It was also north of the $1.34 per share that investors expected.

On the downside, however, Monsanto's sales came in at approximately $3.59 billion, which was south of the $3.71 billion the Street expected. In conjunction with its earnings the company issued guidance. It now expects full-year 2008 EPS of $3.63 on a reported basis and approximately $3.40 on an ongoing basis. In short, that was good news because the analysts polled by FactSet were looking for $3.39 a share prior to the release in late June.

Can Monsanto Keep Growing?
On of September 5, Credit Suisse upgraded its rating to 'outperform' from neutral, and the full fiscal 2008 estimate sits at 3.45 according to Yahoo Finance.

Investors are currently looking for the company to earn $4.48 a share in fiscal 2009 according to Yahoo Finance. That implies a healthy expected rate of growth. The one concern I have with Monsanto is that any stumble could cause the stock to get whacked.

Bottom Line
Food prices will likely continue to rise as our population grows and biofuel development gains popularity.

Potash On the Rebound

Potash (POT), which traded within 6-bits of my verbalized $145 stop level before rebounding to nearly $160 and counting. The good thing about getting to know how a name trades prior to putting money to work (eg: babbling about it constantly in print and on-air) is that it's simply good discipline. The bad thing is, well, it would have been nice to be selling out of a 10% day-trade now rather than just talking about it

RBC Analysts Expect Potash Corp. Stock to Double

Even as sharers of Potash Corp. of Saskatchewan Inc. (POT) are plummeting today, falling by more than 4% to under C$158 in mid-afternoon trading, RBC Capital is expecting the stock to more than double to C$375 as Chinese potash buyers begin negotiations for a pricey new contract in Seattle, Wash.

Analysts Fai Lee and Owen Martin say in a research note that Potash Corp., one of the world's largest potash producers, is currently trading at a flat realized potash price of $430 per tonne (about $530 per tonne delivered), but RBC believes this is far below market prices which range between $900 and $1,100 per tonne.

They also point out that the Belarusian Potash Company is expecting to squeeze higher contract prices out of the Chinese, while Uralkaliy OAO, a Russian potash company, predicts the negotiations will bring prices closer to spot (to about $1,000 per tonne from $640).


The analysts' report says:

(This is) consistent with our view that Potash Corp. Is very attractively valued.

Uralkaliy also made several statements in its recent second quarter conference call that will benefit Potash Corp. The Russian company plans to start production at its proposed Mine-5 greenfield potash mine in 2013, but more importantly, Urakaliy would sacrifice sales volume for higher prices.

The report said:

We believe this is a significant statement and very positive for potash prices in the long term.

On Tuesday, Uralkaliy announced that is had been awarded a tender from Bangladesh at $1,100 per tonne for October delivery, with other markets likely following suit as early as 2009.

RBC Capital derive its share price target from a valuation multiple analysis and discounted cash flow analysis based on an equity discount rate of 8.75%. The price reflects a 2009E Enterprise Value//Earnings Before Interest Depreciation Taxation and Amortization multiple of 8 and a Price/Earnings multiple of 13.5x, plus C$90 per share for future potash expansion projects.

There are numerous obstacles to achieving this growth, however. An unexpected decline in global demand, a drop in fertilizer prices, negative government intervention in China and India, and even a rail-car shortage for carrying potash could all leave Potash Corp. short of its target, the analysts say.

Potash Corp. Update: Time To Buy?

I wrote earlier that I'd once again look at Potash of Saskatchewan (POT) if it got to $150. It was just over $151 today. Since I first wrote about POT at the end of July, a number of negative events mentioned as risks in that earlier post transpired.

1. A strike commenced at three of the company's potash mines. The company's strike updates are here.

2. Grain prices have fallen, as has the price of oil.

3. Sulfur prices have risen.

As POT's competitors, like Mosaic (MOS), have also suffered steep declines in their share prices, the strike doesn't seem to have much of an effect so far (and might not have an effect at all). It's falling crop and oil prices that have pushed the stock down.

Fertilizer prices, meanwhile, seem to be on the rise. Potash has risen to $763 a tonne (1,000 kilograms) in July from $525 in June, according to Globe and Mail. Just recently, China raised the export tax on urea and ammonia to 150%. This should boost nitrogen fertilizer prices worldwide.

The analyst consensus for POT's 2009 earnings stand at $21.29 a share, which has increased by a cent from a month ago. The low estimate is at $15.50 a share. POT is currently trading at just above 10 times the lowest earnings estimate for 2009.

The rising sulfur prices may crimp margins. The mine strike may result is lowered output. It is unclear if analysts have incorporated POT's output in their estimates or whether they are expecting earnings gains to come mostly from margin growth.

The world needs food now and will in the future. All the positive aspects of investing in POT that I mentioned in July are still valid. So POT looks like a pretty good long term investment here, though I will continue to wait for a lower price. If POT can meet earnings expectations, it's starting to look pretty cheap.

The biggest risk is the continued slide in crop prices. If you believe this isn't a deflating bubble but rather a short term correction in a much longer agriculture bull market, it may be a good time to start buying POT.

More on Fundamentals and Stock Prices: The Case of Potash Corp

Earlier we posted an item full of skepticism about garden-variety claims concerning "fundamentals" and stock prices. Then, in our not-even-close-to-nightly fast-forwarding of Fast Money, we heard the following from Guy Adami, just after Jeff Macke suggested Potash (POT) might set up for a decent risk-reward trade in the neighborhood of $150:

Let's talk about Potash. It's trading as though potash prices were about $430 a ton. Potash prices are closer to $1000 a ton. $150 was resistance on the way up back in January, as Jeff pointed out it was support a couple times throughout March. Now's the time to take shots--intelligent shots--as long as you have a stop, everything is fair game. But I think Potash will bottom out right around here.

Now, Potash might turn out to be a perfectly fine trade here.* But here's the point that's relevant to this discussion: How in the heck are investors supposed to know (or even make educated guesses) what (small-p) potash prices are implicit in the current market price of (big-P) Potash? This is in the nature of markets, especially for momentum-driven names like POT.

Market prices depend not just on perceived or projected fundamentals, but on what multiples market participants are willing to pay for whatever combination of earnings and dividends those participants might want. $430 a ton? $600 a ton? $1000 a ton? Whatever the price of potash might be, the price of Potash is going to be a (potentially volatile) function of investor enthusiasm, not just a linear function of higher and lower commodity prices.

What's in Store for the Fertilizer Industry?

After being an active trader in stocks related to the fertilizer industry for the past three years, I have recognized some interesting factors that have had a huge impact on the price movements of these companies' stock prices.

Since the stock price of listed companies in the fertilizer industry peaked in June, it has slumped by approximately 30%. In the same period, the fertilizer industry has experienced 15% higher prices for the fertilizer UREA (same for CAN, Amonia etc). With the fertilizer price booms, we also are watching the prices of oil and natural gas falling sharply, which means higher margins for the fertilizer producing companies. They are reaching all time high profits for their products. Why is this so? Why does the stock price of fertilizer companies fall when they experience higher prices for their products and better margins?

I believe one answer is the food prices ("of course", you might think, but few people care about it on a daily basis). You'll find a high correlation between the corn price (same for wheat, soybeans) and the stock price of i.e Agrium (AGU), Mosaic (MOS) and Potash (POT). It is important to watch the food prices closely. That is why the global sell-off in commodities has also hit fertilizer stocks hard.

In the long term, I believe that fundamentals will win, and last week's news about China hiking and expanding their export taxes on fertilizer will yet again boost international fertilizer prices and hence give better profit. It's a proof that the demand is still strong and supply is still insufficient

And, while the oil price keeps falling, I will keep on buying. Remember, lower oil and natural gas prices gives lower costs.

The global bull run is not over yet!

Potash Still Considered Buyable

Potash Corp. (NYSE: POT - News) has leverage in higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. The company is located in low cost areas and its financials are solid. Hence, we rate the stock a Buy with a target price of $250. This is 18.9x our 2008 estimate.

Potash Corporation enjoys significant cost advantage with regard to raw materials. All potash produced by the company in Saskatchewan is in the area, where extensive potash deposits are found. Moreover, the company has lower cost nitrogen operations in Trinidad due to the long-term, lower-cost gas contracts with Natural Gas Company of Trinidad and Tobago Limited as well as a proximity to the U.S. market.

In response to the rising prices of potash products, the company has engaged in the expansion and development of projects that will raise annual operational capacity to capture a significant share of the growth in global demand.

On August 7, Potash Corporation announced that the unionized employees at its Allan Division, Cory Division and Patience Lake Division operations of Saskatchewan have started strikes after four days of mediation that failed to resolve the key contract issues, primarily centered on profit-sharing demands by the union. The striking employees are members of United Steelworkers (USW), and are responsible for underground mining operations, milling, and shipping activities on the surface..Zacks.com

Oil/Fertilizer Two-Step At An End (POT, MOS)

Most of the big names within the agriculture chemicals industry have pulled back considerably from the multi-year highs clocked early this summer. Fair or not, they have moved nearly lockstep with the falling price of oil and other major commodity groups such as metals, coal and soft commodities like corn, wheat and soybeans.

While the price of the food commodities is indeed instrumental in setting prices on fertilizers, feedstocks and the like, I think the tie between the price of oil and industry leaders like Potash Corp. of Saskatchewan (NYSE:POT), Mosiac (NYSE:MOS) and Agrium (NYSE:AGU) will begin to break down. And this could have big implications for long-term investors.

Don't be misled about the power of the price of oil: it has a profound effect on the global economy. It affects transportation costs, energy costs and the cost of thousands of derivative products that have oil-based products as a key ingredient. But it is not the end all be all for commodities, as pointed out recently by Citigroup analyst Brian Yu: "…the market has failed to recognize that demand for grains rarely cycle (supply cycles though) and has shown little historical correlation with economic activity. The last time we checked, fertilizers and grains are not industrial metals."

First Things First, What's Potash?
Potash is a mineral (potassium carbonate) hidden deep within the ground, and despite what you might think, it's actually a highly-sought after commodity, and more importantly, it's in very limited supply. Potash, along with nitrogen and phosphate, are key ingredients in the fertilizers that are necessary to increase crop yields.

Global demand for food is obviously on the rise, as is the need for increasing crop yields because the per capita land available for farming is falling. However, the trends are more than linear with regard to world population growth or even income growth, because as millions of people in developing nations make income and wealth gains, they increasingly seek to switch from starch-based diets to protein-based diets. And these diets require between two-to-seven kilos of grain to produce just one kilo of beef, pork and poultry. (Read Harvesting Crop Production Reports to learn more about what grain investors need to know before jumping in to this sector.)

Article Highlights Industry Explosion
S&P analyst Richard O'Reilly wrote up an excellent piece on Potash Corp. that highlights many of the exciting metrics being thrown out by the agricultural suppliers. Here are some of the quick highlights from the report, specific to global leader Potash Corp:

Twenty-two percent of global potash capacity; over 10 million tonnes will be delivered in 2008.

Average contracted rates in North America will likely hit over $700 per tonne later this year, up from $182/tonne in 2007.

Recently signed contracts in Asia & South America have hit over $1,000/tonne.

China - the world's largest single buyer - has depleted nearly all its inventories, and will be forced to renew a record supply later this year. Its 2008 contract was priced at $576/tonne.

Similar price trends are in place for the company's two segments, nitrogen and phosphate-based fertilizers and feedstocks.

2008 expected EPS at $12.50, up nearly 400% from 2007. Forecasts for 2009 are in the range of $17.80 per share

Thoughts on Supply, Ethanol

Much has been made about the short-term effect of ethanol production on the price of corn and related commodities like wheat and soybeans. There seems to be a prevailing thought that the switch to ethanol has artificially raised the prices of these commodities.

If you are in the camp that believes ethanol (as we know it now) is not a viable long-term solution to our energy problems, you may be right. It's quite likely that interest in corn-based ethanol has peaked. Frankly, I don't care. Its recent adoption - along with constant growth in worldwide food demand - has served to nearly wipe out the world's grain inventories. According to the USDA the stock-to-use ratio of worldwide inventories is the lowest on record at less than 16%. Nations will need to build up these inventories, which will only add to the demand push in the coming years. (For more on this issue, read The Biofuels Debate Heats Up and Peak Oil: Problems And Possibilities.)

Demand Can't Create Supply
One of the core tenets of capitalism is that when a commodity's price heads towards the moon, greater resource are put towards finding more, even at previously prohibitive costs. Most analysts agree that it can take up to five years to get a new mine up and running before the first pound is extracted. As for right now, demand for potash and other nutrients will outstrip supply this year and in the foreseeable future. Potash Corp. and Mosiac, for their part, are each investing in large capacity upgrades over the next several years, with Potash Corp's capacity growth equal or greater to what the rest of the industry combined will be able to bring on-line by 2013.

A rising dollar could hurt the profits of this group, as the majority of sales are overseas. I strongly believe, however, that any incremental losses will be overridden by the incremental income and wealth gains happening in the BRIC nations and elsewhere in the developing world, and the resulting demand for grain-based foods.

Consider this powerful statistic. In the United States, roughly 15% of every incremental dollar earned - whether through income gains, wealth gains, or via deflation - is spent on food. In China, however, where the majority of the population is below middle-class level, 40% of every incremental dollar is spent on food. In India, the rate is nearly 70%.

Parting Thoughts
I like all three of the major suppliers of fertilizers and feedstocks, and believe all have compelling valuations: all three trade for less than 10-times 2009 estimated earnings, and all three have PEGs much lower than 1.

I prefer Potash Corp. of Saskatchewan because it holds more than $11 billion in equity interests (as of June 30) in its foreign rivals, most of them geographically nested next to the largest growth markets of the world. This provides a nice semi-hedge against rising transportation costs and will add juice to the bottom line that its rivals can't match.

Potash Corp. Poised to Double Market Capitalization

Despite some near term hiccups based on ongoing labour uncertainty and market volatility, Potash Corp. of Saskatchewan Inc. (POT) is still poised to more than double its market capitalization to a whopping C$130-billion sometime over the next year, according to Canaccord Adams analyst Keith Carpenter.

Mr. Carpenter reiterated his "buy" rating and his impressive 12-month price target of C$425 for Potash Corp. shares on Friday, while weighing in on the announcement earlier this week from the company that it has restarted potash mining and milling operations at its Allan mine in Saskatchewan.

In early August, unionized employees at Potash Corp's Allan, Cory and Patience Lake mines potash operations went on strike. Allan is the largest of the mines impacted by the worker's action, accounting for approximately 19% of the company’s annual potash production. The company said in a statement that contingency plans continue to be evaluated for the Cory and Patience Lake facilities while progress on potash debottlenecking and expansion projects at all three sites has been minimally impacted by the strikes.

In a note to clients, Mr. Carpenter said:

While we are encouraged to see contingency measures put in place, in our model we continue to assume a three-month reduction of supply from the three affected mines.

If we were to assume that the strike continues for the remainder of 2008, our full-year EPS estimate would drop to approximately $11.94 from $12.69.

JPMorgan analyst David Silver, meanwhile, said a strike lasting eight weeks would reduce Potash earnings by C$0.15 to C$0.20 per share and importantly may force the company to declare force majeure due to an inability to meet its current contractual commitments. Force majeure is a legal clause that allows a company to miss deliveries because of circumstances beyond its control.

Canaccord's Mr. Carpenter told clients he expects more volatility ahead for the stock in the short term with shares remaining caught up in the current unsettled market sentiment.

But ultimately, he added, the stock will regain its swagger and head towards his lofty price target based on the company's growth profile and earnings that will be "unmatched by its peers."

Monsanto Seeds Its Pipeline

The agricultural biotech business is starting to look a lot like its pharmaceutical counterparts. Monsanto (NYSE: MON) is hooking up with small companies in research and development deals to try and keep potential technology from falling into the hands of rivals Syngenta (NYSE: SYT) and DuPont (NYSE: DD).

Its newest partnership, a five-year deal with Israel-based Evogene, is actually an expansion of a year-old partnership with the company. The duo are expanding the scope of their partnership to include discovering "genes related to yield, environmental stress and fertilizer utilization" -- basically anything that will help the plants grow faster and produce more. The scope of the research was previously limited to increasing nitrogen usage.

Evogene will do the initial discovery research to identify genes that could increase yields and then Monsanto will test the candidates in plants. For its efforts, Monsanto will pay Evogene $35 million over the course of the partnership and pay additional milestone and royalty payments for products that actually get developed. Monsanto is also taking an $18 million equity stake in Evogene, which trades on the Tel Aviv Stock Exchange, and later will purchase another $12 million worth of shares.

While bigger yields are definitely good news for farmers and Monsanto -- since seeds that provide better yields can fetch higher prices -- it is a bit tougher to predict the long-run ramifications for fertilizer players like Mosaic (NYSE: MOS) or PotashCorp (NYSE: POT).

Then again, these potential products are still years away from the fields, so there's no immediate concern for fertilizer producers. Investors just need to watch for upcoming surprises in biotech seed producers' pipelines.