Intrepid Potash(IPI Quote - Cramer on IPI - Stock Picks) closed at $18.45, up 63 cents or 3.54%. On Friday, UBS initiated coverage of four fertilizer companies, rating Intrepid a buy with a price target of $27. UBS also started coverage of Mosaic with a buy rating and price target of $63. Mosaic closed Tuesday at $41.98, down 76 cents or 1.78%.
UBS also started coverage of Terra Industries(TRA Quote - Cramer on TRA - Stock Picks) and CF Holdings(CF Quote - Cramer on CF - Stock Picks) at neutral. Terra closed at $28.09, up 81 cents or 3% Tuesday; CF finished at $71.13, up 74 cents or 1.05%.
Jud Pyle of TheStreet.com took a look at call-spread selling in Monsanto(MON Quote - Cramer on MON - Stock Picks) and Potash(POT Quote - Cramer on POT - Stock Picks). Monsanto closed at $83.10, up 34 cents or 0.41%; Potash finished at $80.81, down 98 cents or 1.20%.
Scotts Miracle Gro(SMG Quote - Cramer on SMG - Stock Picks) finished the day at $34.70, up 15 cents or 0.43%.
Tuesday, March 31, 2009
Options: Call-Spread Selling in Two Ags
We had interesting options action in two agricultural commodity names this morning right out of the gate. In Monsanto (MON Quote - Cramer on MON - Stock Picks) someone sold 5,500 May 95/105 call spreads for about $1.40, and in Potash (POT Quote - Cramer on POT - Stock Picks), there was a seller of 13,000 April 90/95 call spreads for around $1.05. Monsanto is a seed, herbicide and biotech giant with earnings due Thursday, April 2. The main business of Potash is, of course, potash, that mineral salt that contains potassium in a water-soluble form and is so crucial for crop fertilizer
Both of these trades occurred by 10 a.m. EST. With no real movement in the underlying stocks at the open, they tend to indicate large traders with clear intentions. Precisely what these intentions are, we can't be sure. But, as always, it pays to look at what the big money is doing in options and likely reasons why, especially when the stocks are quiet.
First, let's look at the fundamental news environment. We need go no further than "farmers' intentions" to get a handle on what investors might be up to. In the annual USDA report on 2009 planting intentions and quarterly stock data out this morning, the bottom line was that less corn will be planted this year. Some of that acreage will be replaced by soybeans since they cost about 30% less than corn to grow, and some will be idled.
However, since the value of the corn crop at $47 billion in 2008 was 1.7 times the size of the soybean crop, less corn equals less demand for seeds and fertilizer and this could hit sales at MON and POT.
The government report was not as bad as some were expecting, and making forecasts here is tough, with so many variables, but word is that farmers are feeling the pinch of paying more to grow crops with their prices falling
Citigroup threw in its 2-cents this morning by reducing 2009 estimates for both names.
Now let's look at what the call-spread sellers might be watching on an even shorter-term basis. Both MON and POT have had a great run off of the November-December lows. In fact, commodity names like these, along with technology, led the rally and did not make new lows in March with the rest of the market.
For investors who want to remain long these stocks into the spring planting and summer growing seasons, and who want to generate a little income while they consolidate some of their nice gains, selling upside call spreads seems like their kind of dish.
Whether we decide to follow trades like these at some point, looking at credit spreads is a great window on risk/reward in options trading. Volatility in both names is about average, consistent with the current environment, so another way to view the risk/reward is by using a probability calculator.
I used one at OptionsHouse.com that gave me this analysis: with MON at-the-money volatility of 56% for May options, there is about a 20% chance of the stock finishing above breakeven ($96.40) on the 95/105 call spread. And for POT, with ATM volatility of 78%, there is about a 24% chance of the stock ending above breakeven ($91.05) by April expiration on the 90/95 call spread. Let's see what we learn watching the agricultural commodity experts trade. .. thestreet/.com
Both of these trades occurred by 10 a.m. EST. With no real movement in the underlying stocks at the open, they tend to indicate large traders with clear intentions. Precisely what these intentions are, we can't be sure. But, as always, it pays to look at what the big money is doing in options and likely reasons why, especially when the stocks are quiet.
First, let's look at the fundamental news environment. We need go no further than "farmers' intentions" to get a handle on what investors might be up to. In the annual USDA report on 2009 planting intentions and quarterly stock data out this morning, the bottom line was that less corn will be planted this year. Some of that acreage will be replaced by soybeans since they cost about 30% less than corn to grow, and some will be idled.
However, since the value of the corn crop at $47 billion in 2008 was 1.7 times the size of the soybean crop, less corn equals less demand for seeds and fertilizer and this could hit sales at MON and POT.
The government report was not as bad as some were expecting, and making forecasts here is tough, with so many variables, but word is that farmers are feeling the pinch of paying more to grow crops with their prices falling
Citigroup threw in its 2-cents this morning by reducing 2009 estimates for both names.
Now let's look at what the call-spread sellers might be watching on an even shorter-term basis. Both MON and POT have had a great run off of the November-December lows. In fact, commodity names like these, along with technology, led the rally and did not make new lows in March with the rest of the market.
For investors who want to remain long these stocks into the spring planting and summer growing seasons, and who want to generate a little income while they consolidate some of their nice gains, selling upside call spreads seems like their kind of dish.
Whether we decide to follow trades like these at some point, looking at credit spreads is a great window on risk/reward in options trading. Volatility in both names is about average, consistent with the current environment, so another way to view the risk/reward is by using a probability calculator.
I used one at OptionsHouse.com that gave me this analysis: with MON at-the-money volatility of 56% for May options, there is about a 20% chance of the stock finishing above breakeven ($96.40) on the 95/105 call spread. And for POT, with ATM volatility of 78%, there is about a 24% chance of the stock ending above breakeven ($91.05) by April expiration on the 90/95 call spread. Let's see what we learn watching the agricultural commodity experts trade. .. thestreet/.com
Monday, March 30, 2009
Five Reasons to Invest in Agriculture
1. “Quantitative Easing”
US government finally began its “Quantitative Easing” (printing money to buy treasures and other bad assets) process last Wednesday. No wonder SPDR Gold Shares (GLD) holdings rose to a record 1,084-tons last week, up 37% from eight weeks ago. As the world becomes less and less secure in normal investment classes, and people lose faith and confidence in paper money, people turn to hard assets and commodities such as Gold, oil, and agriculture, etc. If GLD and United States Oil (USO) can be up 30% over the last few months, there is no reason why PowerShares DB Agriculture (DBA) was only up 9% from its low.
2. The Consumer Is Back
Last Friday the Commerce Department reported that consumer spending edged up 0.2 percent in February, which follows a huge 1 percent jump in January. Consumer spending accounts for about 70 percent of US economic activity. This seems to be a good sign for recovery. It is easy to free credit because the Fed can always pump in more money (the sky is the limit). However, it is much more difficult for people to spend.
3. Increased Demand from Developing World
Changes in global demand resulting from population growth and changes in standards of living will no doubt push up agriculture price. As Kevin Phillips, author of American Dynasty and American Theocracy, pointed out in his new book Bad Monday, in the US, food represents 14% of the consumer price index, but the ratio is much higher in China (33%) and India (46%). In other words, China and India spend much more of their income on food than the US. Even in a recession, people have to eat.
4. “Agflation”
Two economists at Merrill Lynch coined the term “Agflation” in Spring 2007. It means an increase in the price of food that occurs not only from increased demand from human consumption, but also from its use as an alternative energy resource. As oil stands over $52 now, demand from the biofuels industry should also help demand for agricultural products. Also, “peak oil” means the price increases for grain, soybean, and corn may be more long-lived.
5. Other Unpredictable Factors
Any unpredictable surprises will push up agriculture's price, such as adverse weather conditions, farmer planting decisions, government farm programs and policies, even the occurrence of plant disease, etc.
There are quite a few ways to play with Agriculture. You can buy related industries such as the Agricultural Chemicals industry. Monsanto (MON) is the biggest player in this field, with market cap of $48 billion. It produces corn, soybeans, canola, cottonseeds, vegetable and fruit seeds as well as provides agricultural products for farmers. Potash Corp. of Saskatchewan (POT) is the 2nd largest, with market cap of $26.4B.
The other direct related industry is Farm Products industry. Archer-Daniels-Midland (ADM) is the biggest one, with market cap of $18.6B. It procures, transports, stores, processes, and merchandises agricultural commodities and products. Bunge Ltd. (BG) is a distant 2nd, with market cap of $7.2B.
Agriculture business is capital intensive in nature. In today’s credit crunch market, limitations on access to external financing could adversely affect companies’ operating results. These companies require substantial capital to maintain and upgrade their storage facilities, processing plants, refineries, mills, ports and transportation to keep pace with technological development, regulation requirements and safety standards in the industry, just to name a few.
I chose DBA instead. It is composed of futures contracts on some of the most liquid and widely traded agricultural commodities such as corn, wheat, soybeans and sugar. It jumped 1.71% on 03/19/09 in more than five times average volume.
If history is any guideline, you might as well choose Agricultural Chemicals industry such as MON or POT, since they over-performed DBA by more than 50% over the last 2 years. But look at volatility in the chart above, which conservative investors can’t stand.
After all, even US CPI is using “core” measurement that excludes food and energy because of their “volatility”..seeking alpha
US government finally began its “Quantitative Easing” (printing money to buy treasures and other bad assets) process last Wednesday. No wonder SPDR Gold Shares (GLD) holdings rose to a record 1,084-tons last week, up 37% from eight weeks ago. As the world becomes less and less secure in normal investment classes, and people lose faith and confidence in paper money, people turn to hard assets and commodities such as Gold, oil, and agriculture, etc. If GLD and United States Oil (USO) can be up 30% over the last few months, there is no reason why PowerShares DB Agriculture (DBA) was only up 9% from its low.
2. The Consumer Is Back
Last Friday the Commerce Department reported that consumer spending edged up 0.2 percent in February, which follows a huge 1 percent jump in January. Consumer spending accounts for about 70 percent of US economic activity. This seems to be a good sign for recovery. It is easy to free credit because the Fed can always pump in more money (the sky is the limit). However, it is much more difficult for people to spend.
3. Increased Demand from Developing World
Changes in global demand resulting from population growth and changes in standards of living will no doubt push up agriculture price. As Kevin Phillips, author of American Dynasty and American Theocracy, pointed out in his new book Bad Monday, in the US, food represents 14% of the consumer price index, but the ratio is much higher in China (33%) and India (46%). In other words, China and India spend much more of their income on food than the US. Even in a recession, people have to eat.
4. “Agflation”
Two economists at Merrill Lynch coined the term “Agflation” in Spring 2007. It means an increase in the price of food that occurs not only from increased demand from human consumption, but also from its use as an alternative energy resource. As oil stands over $52 now, demand from the biofuels industry should also help demand for agricultural products. Also, “peak oil” means the price increases for grain, soybean, and corn may be more long-lived.
5. Other Unpredictable Factors
Any unpredictable surprises will push up agriculture's price, such as adverse weather conditions, farmer planting decisions, government farm programs and policies, even the occurrence of plant disease, etc.
There are quite a few ways to play with Agriculture. You can buy related industries such as the Agricultural Chemicals industry. Monsanto (MON) is the biggest player in this field, with market cap of $48 billion. It produces corn, soybeans, canola, cottonseeds, vegetable and fruit seeds as well as provides agricultural products for farmers. Potash Corp. of Saskatchewan (POT) is the 2nd largest, with market cap of $26.4B.
The other direct related industry is Farm Products industry. Archer-Daniels-Midland (ADM) is the biggest one, with market cap of $18.6B. It procures, transports, stores, processes, and merchandises agricultural commodities and products. Bunge Ltd. (BG) is a distant 2nd, with market cap of $7.2B.
Agriculture business is capital intensive in nature. In today’s credit crunch market, limitations on access to external financing could adversely affect companies’ operating results. These companies require substantial capital to maintain and upgrade their storage facilities, processing plants, refineries, mills, ports and transportation to keep pace with technological development, regulation requirements and safety standards in the industry, just to name a few.
I chose DBA instead. It is composed of futures contracts on some of the most liquid and widely traded agricultural commodities such as corn, wheat, soybeans and sugar. It jumped 1.71% on 03/19/09 in more than five times average volume.
If history is any guideline, you might as well choose Agricultural Chemicals industry such as MON or POT, since they over-performed DBA by more than 50% over the last 2 years. But look at volatility in the chart above, which conservative investors can’t stand.
After all, even US CPI is using “core” measurement that excludes food and energy because of their “volatility”..seeking alpha
CF Industries - Eat or Be Eaten?
The saga of what is happening with CF Industries (NYSE: CF - News) took another turn today as Agrium (NYSE: AGU - News) boosted the cash component of its offer by 10% (from $31.70 to $35), which will add $160 million to its bid (from $72 to $75). Terra (NYSE: TRA - News), meanwhile, has rejected CF Industries' offer to take over the company, and a hostile effort will ensue at the next board meeting at CF Industries.
Right now, it is cheaper to buy than build fertilizer assets, and hence the flurry of M&A activity. (This makes one wonder if this could be a market-wide issue, as stock prices are depressed.) Fertilizer prices are mixed, as farmers are waiting for the results of the USDA acreage survey, which will occur next Tuesday.
Right now, our feeling is that Agrium will prevail and CF Industries will be eaten. The company has a fiduciary responsibility to do the best for its shareholders, who are undoubtedly looking for the best exit strategy possible after the market collapse last year.
Right now, it is cheaper to buy than build fertilizer assets, and hence the flurry of M&A activity. (This makes one wonder if this could be a market-wide issue, as stock prices are depressed.) Fertilizer prices are mixed, as farmers are waiting for the results of the USDA acreage survey, which will occur next Tuesday.
Right now, our feeling is that Agrium will prevail and CF Industries will be eaten. The company has a fiduciary responsibility to do the best for its shareholders, who are undoubtedly looking for the best exit strategy possible after the market collapse last year.
Agrium's Aggravation
Hostile bidder's stock slides as CF tells it to get lost (again). Terra, CF's target, drops as well.
Agrium can’t take rejection. Instead of walking away from its unsolicited bid for U.S. fertilizer producer CF Industries Holdings the Canadian fertilizer company keeps banging its head against the wall trying to get CF to agree to its offer.
But CF Industries Holdings (nyse: CF - news - people ) won’t, preferring instead to try to acquire rival Terra Industries (nyse: TRA - news - people ), which is just as uninterested in CF's bid as CF is in Agrium.
Agrium's shares were the big losers among the three stocks on Monday, falling more than 8.0%, a possible indication that its shareholders fear it will raise its bid for CF.
Late Sunday, CF rejected Agrium (nyse: AGU - news - people )’s revised $3.7 billion offer as “grossly inadequate.”
Earlier this month, CF turned down Agrium's original bid as inadequate and sweetened its own offer for Terra. Agrium’s bid is conditional on CF dropping its offer for Terra. (See "Investors Side With Agrium.")
On Friday, Canada-based Agrium increased its offer to $35.00 per share, plus one common share. (See “Fertilizer Bids Keep Growing.”) The cash component of the previous offer had been $31.70. (See "Agrium Tries To Woo CF Industries.") Its bid is now worth $70.19 per CF share, and it has suggested that it might raise that in a friendly deal.
CF has insisted that it is worth $100.00 per share. Chief Executive Stephen R. Wilson said the company continues to believe that pursuing its long-term strategy, which includes its proposed takeover of Terra Industries, is the best way forward.
Agrium can’t take rejection. Instead of walking away from its unsolicited bid for U.S. fertilizer producer CF Industries Holdings the Canadian fertilizer company keeps banging its head against the wall trying to get CF to agree to its offer.
But CF Industries Holdings (nyse: CF - news - people ) won’t, preferring instead to try to acquire rival Terra Industries (nyse: TRA - news - people ), which is just as uninterested in CF's bid as CF is in Agrium.
Agrium's shares were the big losers among the three stocks on Monday, falling more than 8.0%, a possible indication that its shareholders fear it will raise its bid for CF.
Late Sunday, CF rejected Agrium (nyse: AGU - news - people )’s revised $3.7 billion offer as “grossly inadequate.”
Earlier this month, CF turned down Agrium's original bid as inadequate and sweetened its own offer for Terra. Agrium’s bid is conditional on CF dropping its offer for Terra. (See "Investors Side With Agrium.")
On Friday, Canada-based Agrium increased its offer to $35.00 per share, plus one common share. (See “Fertilizer Bids Keep Growing.”) The cash component of the previous offer had been $31.70. (See "Agrium Tries To Woo CF Industries.") Its bid is now worth $70.19 per CF share, and it has suggested that it might raise that in a friendly deal.
CF has insisted that it is worth $100.00 per share. Chief Executive Stephen R. Wilson said the company continues to believe that pursuing its long-term strategy, which includes its proposed takeover of Terra Industries, is the best way forward.
Tuesday, March 24, 2009
CF Industries
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.
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 any nitrogen facility.
The company is in the midst of either being acquired by Agrium Industries or bought out by Terra Industries. As a result, we maintain our Buy rating of the stock and set a target of $75.00..zacks.com
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 any nitrogen facility.
The company is in the midst of either being acquired by Agrium Industries or bought out by Terra Industries. As a result, we maintain our Buy rating of the stock and set a target of $75.00..zacks.com
CF Industries Lowered to Hold
CF Industries Holdings Inc. (NYSE: CF - News) is one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in North America. The company's operations are organized into 2 business segments: the nitrogen fertilizer and the phosphate fertilizer.
The company is in the midst of being acquired by Agrium Industries (NYSE: AGU - News) or buyout of Terra Industries (NYSE: TRA - News). However, there is weak demand and pricing in the interim period.
As a result, we rate the shares a Hold and set a target of $70.00. Currently, CF Industries Holdings is valued at 8.6x our 2009 estimate of $7.91. Our target price is 8.9x our 2009 estimate
The company is in the midst of being acquired by Agrium Industries (NYSE: AGU - News) or buyout of Terra Industries (NYSE: TRA - News). However, there is weak demand and pricing in the interim period.
As a result, we rate the shares a Hold and set a target of $70.00. Currently, CF Industries Holdings is valued at 8.6x our 2009 estimate of $7.91. Our target price is 8.9x our 2009 estimate
Wednesday, March 18, 2009
Potash Continues to Shake off Bad News
As we wrote in Tuesday's piece, it is interesting to see the fertilizer stocks "relatively" shake off some quite bad news of late [Mar 4, 2009: Potash, Mosaic, Intrepid Potash Come Under Pressure After Talk of Uralkai 25% Price Cut]. There is a lot of Mergers & Acquisitions activity in the space [Feb 5, 2009: Agrium Launches 3.6 Billion Bid for CF Industries] [Jan 16, 2009: Congratulations Terra Industries Holders], so that might be helping create a floor under the group and quite frankly, even if earnings estimates drop significantly further into 2009, this is not a particularly expensive sector.
That said, we have another cut in production out of Potash (POT), and I continue to smirk a bit as most of the companies I follow closely continue to use the same language regarding "it's a short term issue and the next quarter everything will be fine." It's been about 2 quarters of this so far - we'll see if they change their tune. With that said, agriculture is my favorite "long term" sector and this is the easiest way to play that very long term thesis.
This does highlight another theme: when stocks (or markets) want to go up, there is rather little news flow can do (aside from completely out of left field news events) that will dissuade it. In a move upward,you want to see bad news ignored, as all things being equal, that is bullish.
Via Reuters
Potash Corp of Saskatchewan (POT), the world's largest fertilizer producer, plans to further curtail potash production after recent industry data showed that North American potash inventories have risen. The output cuts reflect a continuing near-term drawdown of inventories as customers work through stockpiles built up before the global economic crisis hit, Potash Corp said in a statement posted to its website on Monday.
The company said it plans to reduce 2009 potash production by an additional 1.5 million tonnes, bringing the total expected curtailments of operational capacity this year to at least 3.5 million tonnes.
Potash Corp said it still expects a strong rebound in potash demand in the second half of 2009 that should continue into 2010. (of course)
The latest data from the Fertilizer Institute indicates that potash inventories at North American producers are 42 percent higher than the previous five-year average. (not good) North American potash shipments in both domestic and export markets were nearly nonexistent in February, down 80 percent from the year-earlier level to another record low of 200,000 tonnes, Bank of America/Merrill Lynch analyst Steve Byrne said in a note to clients. (scary bad)
In a separate research note, BMO Capital Markets analyst Edwin Chee lowered his 2009 and 2010 earnings estimates for Potash Corp and also cut his share-price target for the company.
That said, we have another cut in production out of Potash (POT), and I continue to smirk a bit as most of the companies I follow closely continue to use the same language regarding "it's a short term issue and the next quarter everything will be fine." It's been about 2 quarters of this so far - we'll see if they change their tune. With that said, agriculture is my favorite "long term" sector and this is the easiest way to play that very long term thesis.
This does highlight another theme: when stocks (or markets) want to go up, there is rather little news flow can do (aside from completely out of left field news events) that will dissuade it. In a move upward,you want to see bad news ignored, as all things being equal, that is bullish.
Via Reuters
Potash Corp of Saskatchewan (POT), the world's largest fertilizer producer, plans to further curtail potash production after recent industry data showed that North American potash inventories have risen. The output cuts reflect a continuing near-term drawdown of inventories as customers work through stockpiles built up before the global economic crisis hit, Potash Corp said in a statement posted to its website on Monday.
The company said it plans to reduce 2009 potash production by an additional 1.5 million tonnes, bringing the total expected curtailments of operational capacity this year to at least 3.5 million tonnes.
Potash Corp said it still expects a strong rebound in potash demand in the second half of 2009 that should continue into 2010. (of course)
The latest data from the Fertilizer Institute indicates that potash inventories at North American producers are 42 percent higher than the previous five-year average. (not good) North American potash shipments in both domestic and export markets were nearly nonexistent in February, down 80 percent from the year-earlier level to another record low of 200,000 tonnes, Bank of America/Merrill Lynch analyst Steve Byrne said in a note to clients. (scary bad)
In a separate research note, BMO Capital Markets analyst Edwin Chee lowered his 2009 and 2010 earnings estimates for Potash Corp and also cut his share-price target for the company.
Fertile Territory: Three Well-Run Operations
The stock market occasionally takes on a kind of soap opera tone, with emotions running high and complicated romantic tangles proliferating.
There’s a kind of acquisition competition affecting three fertilizer companies, right now that has a little of the “He loves her, but she loves someone else” flavor.
Agrium (AGU), a Canadian fertilizer company with a market cap of $5.8 billion is trying to buy CF Industries (CF), an Illinois company with a market cap of $3.2 billion. CF, in the meantime, is trying to acquire Terra Industries (TRA), an Iowa company that’s capped at $2.5 billion.
CF Industries has rejected the cash-and-stock offer from Agrium, complaining that it grossly undervalues its operations.
For its part, Terra has given thumbs down to CF Industries, saying that its offer “substantially undervalues Terra both absolutely and relative to CF.”
There’s no telling how much of this posturing represents genuine disagreement and how much is just low-balling versus pro-forma squeezing. CF Industries is likely using its takeover bid for Terra to achieve a growth spurt that will put it on an even keel with Agrium, allowing it to stay independent. Unlike soap operas, sentiment doesn’t usually play much of a role in these negotiations and most companies have a price at which their management would be happy to sell them out.
But one thing is sure. Whichever company winds up swallowing which, the demand for fertilizer isn’t going away, and with a P/E ratio of 6 (Agrium) and 8 (CF and Terra), there’s a lot of value here. AGR peaked at 113 last June, fell to 22 in December and has recovered to 37. For CF, the peak/bottom/recovery numbers are 173/38/67. Terra’s are 58/11/25.
All three companies pay a dividend and are likely to appreciate more as the market recovers, although it’s doubtful they will approach their mid-2008 highs. For an investor who’s either nimble enough to play the bumps and drops of a takeover fight or determined enough to buy and hold, these are three highly profitable, well-run operations. As with the NCAA tournament, all you have to do is pick ‘em..seeking alpha
There’s a kind of acquisition competition affecting three fertilizer companies, right now that has a little of the “He loves her, but she loves someone else” flavor.
Agrium (AGU), a Canadian fertilizer company with a market cap of $5.8 billion is trying to buy CF Industries (CF), an Illinois company with a market cap of $3.2 billion. CF, in the meantime, is trying to acquire Terra Industries (TRA), an Iowa company that’s capped at $2.5 billion.
CF Industries has rejected the cash-and-stock offer from Agrium, complaining that it grossly undervalues its operations.
For its part, Terra has given thumbs down to CF Industries, saying that its offer “substantially undervalues Terra both absolutely and relative to CF.”
There’s no telling how much of this posturing represents genuine disagreement and how much is just low-balling versus pro-forma squeezing. CF Industries is likely using its takeover bid for Terra to achieve a growth spurt that will put it on an even keel with Agrium, allowing it to stay independent. Unlike soap operas, sentiment doesn’t usually play much of a role in these negotiations and most companies have a price at which their management would be happy to sell them out.
But one thing is sure. Whichever company winds up swallowing which, the demand for fertilizer isn’t going away, and with a P/E ratio of 6 (Agrium) and 8 (CF and Terra), there’s a lot of value here. AGR peaked at 113 last June, fell to 22 in December and has recovered to 37. For CF, the peak/bottom/recovery numbers are 173/38/67. Terra’s are 58/11/25.
All three companies pay a dividend and are likely to appreciate more as the market recovers, although it’s doubtful they will approach their mid-2008 highs. For an investor who’s either nimble enough to play the bumps and drops of a takeover fight or determined enough to buy and hold, these are three highly profitable, well-run operations. As with the NCAA tournament, all you have to do is pick ‘em..seeking alpha
Agrium Grows Organically & Otherwise
Agrium Indisutries, Inc. (NYSE: AGU - News) is growing through acquisition and organic expansion. The acquisition of United Agri-Products is driving revenues and profits supported by an expanded product line in the major business segment.
However, the company is affected by the global credit crunch, resulting in postponement of fertilizer purchases by the farmers. Moreover, lower international demand as well as reduced crop and energy prices have added to the market uncertainty and resulted in a significant decline in phosphate and nitrogen prices. These factors lead to many North American farmers deferring much of their fall 2008 crop nutrient applications to 2009.
Nevertheless, Agrium expects the situation to improve in the near future. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $43.00.
However, the company is affected by the global credit crunch, resulting in postponement of fertilizer purchases by the farmers. Moreover, lower international demand as well as reduced crop and energy prices have added to the market uncertainty and resulted in a significant decline in phosphate and nitrogen prices. These factors lead to many North American farmers deferring much of their fall 2008 crop nutrient applications to 2009.
Nevertheless, Agrium expects the situation to improve in the near future. The company also has a significant free cash flow. Therefore, we rate the shares a Buy with a target of $43.00.
Monday, March 9, 2009
CF Industries rejects Agrium bid, revises Terra offer
CF revises bid for Terra, rejects Agrium offer
* CF closed up 1.6 pct, while Terra closed down 3.6 pct
* Agrium shares close up 3.7 percent (Changes dateline, adds Agrium comment, background, byline)
By Euan Rocha and Scott Anderson
NEW YORK/TORONTO, March 9 (Reuters) - U.S. fertilizer maker CF Industries Holdings Inc's (CF.N) board rejected an unsolicited $3.6 billion bid from Agrium Inc as inadequate on Monday, and revised its offer for Terra Industries Inc (TRA.N).
Agrium (AGU.TO)(AGU.N), a rival, Canadian-based fertilizer producer, launched an unsolicited offer last month to buy CF for cash and stock to expand its presence in the nitrogen and phosphate fertilizer markets.
The bid was conditional on CF dropping its hostile offer for Terra, a U.S.-based fertilizer producer that has rejected CF's approach.
CF said Monday Agrium's proposal is a transparent attempt to interfere with its bid for Terra.
Agrium said it remains committed to acquiring CF and plans to commence an exchange offer shortly to acquire all outstanding CF stock.
"We are deeply disappointed that CF's board of directors has rejected Agrium's proposal without even attempting to engage us in exploratory discussions," said Agrium President and Chief Executive Mike Wilson in a statement.
TERRA BID
CF also altered its proposed offer for Terra. As long as CF's shares trade above Friday's closing price of $60.59, Terra shareholders would get at least $27.50 a share, or more.
Illinois-based CF earlier offered 0.4235 of its own shares for every share of Terra. It altered its exchange ratio to not less than 0.4129 of a CF share and not more than 0.4539 of a share.
As long as CF's shares trade between $60.59 and $66.60, Terra's shareholders will get $27.50 a share. However, Terra shareholders could get more than or less than that amount if CF shares move above, or below, that trading range, according to an investor presentation.
CF's initial offer in January valued Terra at $20 a share.
CF shares closed up 1.6 percent at $61.56, while Terra closed down 3.6 percent at $25.17, both on the New York Stock Exchange. Agrium ended up 3.7 percent at $32.58 on the NYSE.
CF is ready to issue up to 19.9 percent of its common shares required to do the deal with Terra, while the rest would be in preferred shares that would convert to common shares after the deal is done.
With its proposal, CF would circumvent a NYSE rule that requires shareholders of any NYSE-listed company to vote on the issuance of additional common stock if the issue increases outstanding shares by 20 percent or more.
"They are getting around going to CF shareholders. That way they can shrug off the Agrium offer," said Richard Kelertas, an analyst at Dundee Securities, in Montreal.
"It is now in the hands of Terra shareholders which I think will still reject it because they don't particularly want CF, and I believe once CF shareholders see this, they will be up in arms with their board." (Reporting by Euan Rocha and Scott Anderson; Editing by Frank McGurty and Jeffrey Benkoe)
* CF closed up 1.6 pct, while Terra closed down 3.6 pct
* Agrium shares close up 3.7 percent (Changes dateline, adds Agrium comment, background, byline)
By Euan Rocha and Scott Anderson
NEW YORK/TORONTO, March 9 (Reuters) - U.S. fertilizer maker CF Industries Holdings Inc's (CF.N) board rejected an unsolicited $3.6 billion bid from Agrium Inc as inadequate on Monday, and revised its offer for Terra Industries Inc (TRA.N).
Agrium (AGU.TO)(AGU.N), a rival, Canadian-based fertilizer producer, launched an unsolicited offer last month to buy CF for cash and stock to expand its presence in the nitrogen and phosphate fertilizer markets.
The bid was conditional on CF dropping its hostile offer for Terra, a U.S.-based fertilizer producer that has rejected CF's approach.
CF said Monday Agrium's proposal is a transparent attempt to interfere with its bid for Terra.
Agrium said it remains committed to acquiring CF and plans to commence an exchange offer shortly to acquire all outstanding CF stock.
"We are deeply disappointed that CF's board of directors has rejected Agrium's proposal without even attempting to engage us in exploratory discussions," said Agrium President and Chief Executive Mike Wilson in a statement.
TERRA BID
CF also altered its proposed offer for Terra. As long as CF's shares trade above Friday's closing price of $60.59, Terra shareholders would get at least $27.50 a share, or more.
Illinois-based CF earlier offered 0.4235 of its own shares for every share of Terra. It altered its exchange ratio to not less than 0.4129 of a CF share and not more than 0.4539 of a share.
As long as CF's shares trade between $60.59 and $66.60, Terra's shareholders will get $27.50 a share. However, Terra shareholders could get more than or less than that amount if CF shares move above, or below, that trading range, according to an investor presentation.
CF's initial offer in January valued Terra at $20 a share.
CF shares closed up 1.6 percent at $61.56, while Terra closed down 3.6 percent at $25.17, both on the New York Stock Exchange. Agrium ended up 3.7 percent at $32.58 on the NYSE.
CF is ready to issue up to 19.9 percent of its common shares required to do the deal with Terra, while the rest would be in preferred shares that would convert to common shares after the deal is done.
With its proposal, CF would circumvent a NYSE rule that requires shareholders of any NYSE-listed company to vote on the issuance of additional common stock if the issue increases outstanding shares by 20 percent or more.
"They are getting around going to CF shareholders. That way they can shrug off the Agrium offer," said Richard Kelertas, an analyst at Dundee Securities, in Montreal.
"It is now in the hands of Terra shareholders which I think will still reject it because they don't particularly want CF, and I believe once CF shareholders see this, they will be up in arms with their board." (Reporting by Euan Rocha and Scott Anderson; Editing by Frank McGurty and Jeffrey Benkoe)
Taking Prudent Approach: Exiting Potash
Investing is never easy. Even if we apply thorough, well-reasoned analysis, the possibility exists that the markets will invalidate our thesis and move against us. Knowing this, we are pleased when our approach delivers a trade that acts as expected and yields substantial rewards. An example is the short of Potash (POT) first recommended in my weekly newsletter
As I detailed in an article on Seeking Alpha last week, the initial trade occurred when POT was trading close to a long-standing resistance level, thus offering limited risk but immense upside potential.
A principle I have often discussed is that when an important technical price point falls, dramatic movement occurs. This belief allowed us to exit First Solar (FSLR) prior to a large sell-off and will enable us to determine a price target for POT.
With POT moving below the 50-day moving average, prices have cascaded lower. As there is no discernible support, we can expect the shares to retest their lows ($49.60) in the coming weeks. Having already seen a 28% return on this position, the ultimate collapse would yield substantial gains. If we were investing in a vacuum, the clear decision would be to allow POT to continue sinking and squeeze every dime of gains from this position.
However, we do not exist in a vacuum. I have often stated that we are in a range-bound traders' market where quickly realizing gains will allow us to accumulate outsized returns. With the market oversold and in need of a rally, I will not allow hard-fought gains to be surrendered as we attempt to squeeze every penny from this trade. Instead, I recommend a prudent approach that will allow us to benefit from a further drop in POT while also moving money off the table. To satisfy this dual mandate, I recommend closing 50% of the short POT position as this week's technical trade
..Sean Hannon in seeking alpha
As I detailed in an article on Seeking Alpha last week, the initial trade occurred when POT was trading close to a long-standing resistance level, thus offering limited risk but immense upside potential.
A principle I have often discussed is that when an important technical price point falls, dramatic movement occurs. This belief allowed us to exit First Solar (FSLR) prior to a large sell-off and will enable us to determine a price target for POT.
With POT moving below the 50-day moving average, prices have cascaded lower. As there is no discernible support, we can expect the shares to retest their lows ($49.60) in the coming weeks. Having already seen a 28% return on this position, the ultimate collapse would yield substantial gains. If we were investing in a vacuum, the clear decision would be to allow POT to continue sinking and squeeze every dime of gains from this position.
However, we do not exist in a vacuum. I have often stated that we are in a range-bound traders' market where quickly realizing gains will allow us to accumulate outsized returns. With the market oversold and in need of a rally, I will not allow hard-fought gains to be surrendered as we attempt to squeeze every penny from this trade. Instead, I recommend a prudent approach that will allow us to benefit from a further drop in POT while also moving money off the table. To satisfy this dual mandate, I recommend closing 50% of the short POT position as this week's technical trade
..Sean Hannon in seeking alpha
Intrepid Potash: Pressure From All Sides
Shares of Intrepid Potash Inc. (IPI) have dropped sharply this week as pressures have mounted in various forms. For starters, the Dow has dropped 8.1% in just the last 5 trading days. It’s tough for any growth stock to avoid losses in that environment. At the same time, the company announced earnings this week. Numbers for the fourth quarter weren’t particularly bad, but there was little reassurance that management could give investors for the coming months. Finally, the potash industry took another blow when Russian miner Uralkali officially cut prices of potash to Brazil by 25%.
Looking closely at the earnings report, it was a bit refreshing to see management acknowledging the tough environment and taking steps to protect shareholders. While earnings were quite high compared to last year’s numbers, the picture for Q1 2009 and following remains cloudy. IPI was able to report sharp profit gains while selling only 94,000 short tons of potash compared to the 215,000 tons it sold in the fourth quarter of 2007. The difference is the realized price of $762 per short ton in 2008 compared to $224 realized in 2007.
In order to maintain financial health in a market with waning demand the company has several options on its plate:
Mine Shutdowns - Closing locations would result in decreased potash production, but would allow the company to save on costs. The resources would be preserved for a later date when presumably prices are more attractive.
Deferrals of Capital Expenditures - Intrepid has many projects that are expensive to maintain, but result in discovery or new production of product. Reducing the capital for these projects would again decrease production but save costs until the market turns
Reduce Operation Levels - Short of actually closing mines, the company could simply “tone down” its level of production and spend less on labor, maintenance, and supplies.
Management made no attempts to assure investors of better days ahead but instead categorized the current market as “erratic and unpredictable.” Much of the production that had been sold to oil and natural gas markets is now being converted for agricultural use. IPI is being forced to adapt to a new environment and appears willing and able to make such transitions.
In 2009, the company intends to spend anywhere from $100 million to $140 million on capex projects. The range is quite wide because the spending depends on exactly how the year progresses. $45 to $65 million of this will be earmarked for sustainability and improvement projects while the remaining $55 to $75 million will be for investments in opportunistic projects. Since the company is sitting on cash of $116.6 million (as of 12/31), no debt, and has access to a $125 million line of credit, the budget should be adequately funded.
With consensus earnings expectations of $2.54 per share in 2009, and $2.84 in 2010, the shares appear to be a good value near $15. The ZachStocks Growth Model has a position in IPI and while obviously I wish we had waited until today to make that investment, the long-term potential for this stock remains attractive. I remain optimistic that this position will realize gains over the coming 6 to 12 months...seeking alpha
Looking closely at the earnings report, it was a bit refreshing to see management acknowledging the tough environment and taking steps to protect shareholders. While earnings were quite high compared to last year’s numbers, the picture for Q1 2009 and following remains cloudy. IPI was able to report sharp profit gains while selling only 94,000 short tons of potash compared to the 215,000 tons it sold in the fourth quarter of 2007. The difference is the realized price of $762 per short ton in 2008 compared to $224 realized in 2007.
In order to maintain financial health in a market with waning demand the company has several options on its plate:
Mine Shutdowns - Closing locations would result in decreased potash production, but would allow the company to save on costs. The resources would be preserved for a later date when presumably prices are more attractive.
Deferrals of Capital Expenditures - Intrepid has many projects that are expensive to maintain, but result in discovery or new production of product. Reducing the capital for these projects would again decrease production but save costs until the market turns
Reduce Operation Levels - Short of actually closing mines, the company could simply “tone down” its level of production and spend less on labor, maintenance, and supplies.
Management made no attempts to assure investors of better days ahead but instead categorized the current market as “erratic and unpredictable.” Much of the production that had been sold to oil and natural gas markets is now being converted for agricultural use. IPI is being forced to adapt to a new environment and appears willing and able to make such transitions.
In 2009, the company intends to spend anywhere from $100 million to $140 million on capex projects. The range is quite wide because the spending depends on exactly how the year progresses. $45 to $65 million of this will be earmarked for sustainability and improvement projects while the remaining $55 to $75 million will be for investments in opportunistic projects. Since the company is sitting on cash of $116.6 million (as of 12/31), no debt, and has access to a $125 million line of credit, the budget should be adequately funded.
With consensus earnings expectations of $2.54 per share in 2009, and $2.84 in 2010, the shares appear to be a good value near $15. The ZachStocks Growth Model has a position in IPI and while obviously I wish we had waited until today to make that investment, the long-term potential for this stock remains attractive. I remain optimistic that this position will realize gains over the coming 6 to 12 months...seeking alpha
Tuesday, March 3, 2009
Ag Stocks Offer Long-Term Value
The recent credit crisis has dampened short-term loans made by banks to farmers for fertilizer, seed and various chemicals, all of which are desperately needed to improve the health and duration of their crops
Nevertheless, agricultural companies should not be shunned here. They offer a unique long-term opportunity for those investors who believe in the global growth story.
Despite a global recession, people around the world need to eat. As the demographic trend shifts from starch-based diets to protein-based diets, agricultural companies that are positively positioned to capture this trend will likely move higher.
Additionally, the proposal of several strategic acquisitions within the agricultural sector supports the long-term value thesis within the agricultural sector as a whole.
Nevertheless, agricultural companies should not be shunned here. They offer a unique long-term opportunity for those investors who believe in the global growth story.
Despite a global recession, people around the world need to eat. As the demographic trend shifts from starch-based diets to protein-based diets, agricultural companies that are positively positioned to capture this trend will likely move higher.
Additionally, the proposal of several strategic acquisitions within the agricultural sector supports the long-term value thesis within the agricultural sector as a whole.
Will Terra Industries Reverse Its Position on CF Industries?
Agrium (AGR) has announced a $72.00 per share offer for CF Industries (CF), valuing the company at $3.6b.
This action by AGR is very clearly an attempt to prevent the possible Terra Industries (TRA) - CF combination which would threaten AGR's top position in most major fertilizer segments. From that standpoint, AGR's offer make perfectly good sense as any situation that disrupts TRA/CF would benefit AGR in the long run.
As of this entry, CF has not responded to the unsolicited offer. Suffice it to say that a CF-AGR combination poses some troubling antitrust issues, as these are currently the top two players in multiple fertilizer product niches. Any formal agreement between these companies would very likely require divestitures in order to maintain competition for various fertilizer products.
That being said, this is somewhat reminiscent of last year's AW-RSG transaction where Waste Management (WMI) attempted, and failed, to prevent the merger of its two closest competitors. Naturally, that situation involved a friendly, formal agreement between AW and RSG which is absent in this situation. However, Agrium's offer for CF should at least now compel TRA to seriously consider the consequences of continuing to reject the CF offer. If AGR and CF do eventually combine, TRA would be permanently relegated to a distant second-tier position within the fertilizer industry. This fact alone may be the catalyst to reversing TRA's current position with respect to CF.
This action by AGR is very clearly an attempt to prevent the possible Terra Industries (TRA) - CF combination which would threaten AGR's top position in most major fertilizer segments. From that standpoint, AGR's offer make perfectly good sense as any situation that disrupts TRA/CF would benefit AGR in the long run.
As of this entry, CF has not responded to the unsolicited offer. Suffice it to say that a CF-AGR combination poses some troubling antitrust issues, as these are currently the top two players in multiple fertilizer product niches. Any formal agreement between these companies would very likely require divestitures in order to maintain competition for various fertilizer products.
That being said, this is somewhat reminiscent of last year's AW-RSG transaction where Waste Management (WMI) attempted, and failed, to prevent the merger of its two closest competitors. Naturally, that situation involved a friendly, formal agreement between AW and RSG which is absent in this situation. However, Agrium's offer for CF should at least now compel TRA to seriously consider the consequences of continuing to reject the CF offer. If AGR and CF do eventually combine, TRA would be permanently relegated to a distant second-tier position within the fertilizer industry. This fact alone may be the catalyst to reversing TRA's current position with respect to CF.
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