In 2021, fertilizer companies benefited from high food demand, a rise in commodity prices, and a restricted supply chain due to the pandemic. The momentum got stronger after the onset of the Ukraine-Russia war in the first quarter of 2022.
The S&P 500 Fertilizers & Agricultural Chemicals sub-industry index rose a whopping 27.1% last year. It has expanded 11.4% so far in 2022. The year-to-date increase would have been higher if the index could skip a nearly 22% decline in the last three months.
For many investors, this price correction could mean the end of the booming period for the fertilizer industry in the United States. However, for some, this could be an opportunity to gain exposure to this industry at cheaper prices.
The Recent Correction Could Be a Blessing in Disguise
Fundamentals of the fertilizer market in the United States and globally appear strong enough to withstand hurdles like the recent correction in the market.
Demand for fertilizers is high domestically and internationally, which is driven by the need to boost crop yields and nutritional content and lower costs of production. The United States consumes approximately 10% of fertilizers produced across the globe. While in-house production satisfies a major part of the demand for phosphorus and nitrogen fertilizers, the country imports potassium fertilizers to meet its domestic need.
Meanwhile, supply-chain disruptions due to the ongoing war and sanctions on Russia and Belarus are keeping the supply at low levels in the industry. Interestingly, Russia and Belarus account for nearly 25% of the global export of fertilizers (all kinds), while contributing 33.3% of potassium fertilizer exports worldwide.
Also, China’s issues with the export of phosphorus fertilizer and Europe’s lower production levels of ammonia (which is necessary for the production of nitrogen fertilizers), due to high natural gas prices, have aggravated the supply headwind.
According to International Fertilizers Association, the demand for fertilizers globally is forecast to be 208.3 million metric tons in 2025-2026, reflecting an increase of 1.4% CAGR from the 2021-2022 level. Demand for nitrogen fertilizer is likely to be 114.5 million metric tons in 2025-2026, while phosphorus and potassium fertilizers are expected at 52.5 and 41.2 million metric tons, respectively.
Against this backdrop, let’s talk about two important players in the U.S. fertilizer industry.
The Mosaic Company (NYSE: MOS)
The $16.4-billion company is the leading producer of concentrated crop nutrients ( both potash and phosphate-based) across the globe. Headquartered in Plymouth, MN, the company has a solid customer base in nearly 40 countries worldwide.
In May 2022, Mosaic’s President and CEO, Joc O’Rourke, said, “Looking forward, we expect higher annual production across our global platform in both potash and phosphates…”
On TipRanks, Mosaic has a Moderate Buy consensus rating based on six Buys, four Holds, and one Sell. MOS’ average price forecast is $74.18, reflecting 65.32% upside potential from current levels. Shares of MOS have grown 12.15% year-to-date but declined 12.76% in the past month.
Also, financial bloggers on TipRanks are 90% Bullish on MOS, compared to the sector average of 73%.
On the contrary, the nervousness around the prevailing headwinds seems to have kept investors and insiders at bay. In the last quarter, hedge funds’ holdings in MOS decreased by 7.4 million shares. Also, insiders have sold $597.3 thousand worth of MOS shares in the last three months.
The company has a beta (reflecting the stock’s agility to market volatility) of 1.59 and a dividend yield of 0.91%. The consensus estimate for its second-quarter earnings is pegged at $4.06 per share, above the year-ago tally of $1.17 per share.
CF Industries Holdings, Inc. (NYSE: CF)
The Deerfield, IL-based company has expertise in making nitrogen fertilizers (ammonium nitrate, urea, and ammonia products). Its market capitalization is $17.9 billion. Shares of CF Industries are up 21.96% year-to-date. However, CF stock has declined 1.13% in the last 30 days.
The company’s President and CEO, Tony Will, said, “Global grains stocks remain extremely low, an issue that has become amplified because of Russia’s invasion of Ukraine. We think it will take at least 2-3 years to replenish global grains stocks.”
The Street has a Hold consensus rating on CF stock, which is based on two Buys and eight Holds. Also, hedge funds lowered their holdings in the company by 916.5 thousand shares in the last quarter. Similarly, insiders decreased their exposure by $3.9 million worth of CF shares in the last three months.
Despite the skepticism among analysts, CF’s average price target of $105.90 suggests upside potential of 22.65% from the current level. Also, financial bloggers are 85% Bullish on CF versus the sector average of 73%.
Analysts expect the company to post earnings of $6.27 per share in the second quarter, above the $1.15 per share recorded in the year-ago quarter. The company’s dividend yield and beta stand at 1.51% and 1.20, respectively.
Risky Now, Rewarding Later
Without a doubt, the current headwinds are major concerns for Mosaic and CF Industries. A beta of more than one and top investors shelling their holdings raise doubts about the prospects of these players.
However, the fertilizer industry’s solid medium-to-long-term prospects are expected to be tailwinds for these companies. Also, strength in their stock prices, impressive EPS estimates, optimism of management and financial bloggers, and healthy dividend yields make MOS and CF stocks attractive for medium-to-long-term investors.
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