Comparing Fertilizers Stocks

One can correctly argue that fertilizer stocks have run out of steam. Goldman Sachs, on the one hand, is bearish, while Citigroup, Merrill Lynch and Morgan Stanley are positive on the sector going forward. I tend to take the side of the latter. Though I have a neutral rating for the time being, I personally think that this sector, which includes agriculture commodities, will outperform the most once we are out of this recession. Morgan Stanley predicted some of the fertilizer stocks to peak in 2011, the simple logic being that no matter, what the world has to eat; growing population; decrease in agricultural land; and pollution.

Fertilizers fall into three different categories: nitrogen, phosphate and potash. Prices of these three commodities have fallen significantly off the cliff. The worst decline has been in the case of nitrogen, while less in case of phosphate and significantly less for potash (due to monopoly). TRA, which is PURELY a nitrogen play, has been hit hard. The company has reduced and idled a number of its operations due to recession. TNH, which is a subsidiary of TRA, has held up relatively well, partially because of its hefty dividend of 11.80 per shares.

AGU deals in all three of these areas. However, it has a record level of inventory at 2.5 bn (almost 50% of current assets), and with demand falling off due to the credit crunch, it may have to take mark-down losses with inventory prices going down.

MOS and POT are my favorites in the area with strong balance sheets. They supply nitrogen, phosphate and potash fertilizers worldwide and are safe on the inventory side unlike AGU. POT controls 22% of the potash supply. Along with MOS and AGU, they have a monopoly in potash, whose prices have held up relatively well so far. This monopoly may not continue to exist since mining giants like RTP and BHP are entering this area. Other small competitors in this area include IPI.

Another name that strikes me is little known CF Industries (CF). It has the highest room for future growth. CF deals mainly in nitrogen and phosphate based fertilizers, both in manufacturing and retail distribution. Apart from a strong balance sheet and the lowest P/E among all, another aspect that surprises me is that the company has business ONLY in North America. Almost 90% of its revenue and profits so far come from the US. The company is building scale and operations to expand outside of the US. It hired Bert A. Frost from ADM (one of the world's largest food processing company) as VP to extend operations outside of the us US (see here). The company is in the process of finalizing new plants in Peru.