One Industry That Will Do Wonders For Your Portfolio: Part II
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In Part I of this series, the key players in the global fertilizers and agricultural chemicals industry were introduced, and a geographic breakdown was provided. Part II will discuss demographics affecting the industry, key inputs used, and will assess the valuation of the five most important players in this marketplace.
The Food and Agriculture Organization (FAO), stated that even though growth rates have been slowing since the late 1970s, the world’s population has nevertheless doubled since that time to 6.9 billion, and is projected to increase considerably over the next few decades. In many developing countries, a combination of declining mortality rates, prolonged life expectancy, youthful age structures and high fertility warrant considerable population increases that are likely to continue until the end of the twenty-first century.
The FAO revealed in The Resource Outlook to 2050, that at this time, more than 1.5 billion hectares of the globe’s land surface (about 12 percent) is used for crop production (arable land and land under permanent crops). There is little scope for further expansion of agricultural land. Although nearly 5 billion hectares of land potentially suitable for agriculture, much of it is covered by forests, protected for environmental reasons, or employed for urban settlements. Arable land per person has decreased 1.5% from 1970 to 2009.
Nutrient inputs in crop production have been the driving factor behind increased crop yields, but this system of farming has come under increased scrutiny because of the potential for environmental impacts from inputs such as nitrogen (N), potassium (K) and phosphorous (P). Potential risks are often widely publicized while the associated benefits of an abundant, affordable, and healthful food supply can be overlooked or understated. On average, fertilizers attribute up to 60% of crop yields. N, P, and K make up the majority of nutrient inputs necessary to sustain current crop yields. Using these inputs efficiently and in concert is essential in today’s agriculture and will be even more important in years to come. In order to meet the food supply needs of a growing world population, effective use of fertilizers is imperative.
It’s no mystery among the farm community that nitrogen is used by plants to synthesize proteins, nucleic acids and hormones, and phosphorus and potassium act as raw materials for nucleic acids and other proteins. These are the ties that hold together the most important nutrients in modern fertilizers. P and K come from mines and such resources are limited. Atmospheric nitrogen is effectively unlimited, but this is not in a form useful to plants. Ammonia is the most important source of nitrogen in fertilizers and this has made it one of the most important chemicals in the United States. In the past 70 years, the use of fertilizers has more than quadrupled. Farmers are using more and more fertilizer in attempt to boost yields and offset lost fertility that stems from erosion.
Because of increased demand and increased population, the demand for nitrogen based fertilizers will continue to be high. The fertilizer industry is considered a mature industry but a growing and changing one. This is displayed by many fertilizer companies devoting their R&D to finding levers to improve techniques and production methods to lower costs rather than attempting to develop new and different ways of producing fertilizer.
Valuing the Key Players
Syngenta (NYSE: SYT) has a market cap of about $34 billion, and is the largest agrochemical business in the world. Their $10.1 billion crop protection division is number one in the world, while its $3.1 billion seed and genomics business is number three in the world. The agrochemical business is trading at 20.53 times their earnings. Syngenta is the only company among the comparables whose current P/E is higher than their five year average P/E. In terms of EV/EBITDA and P/E, Syngenta is more expensive than every company other than Monsanto. The high valuation stems Syngenta’s strong presence in emerging markets and better profit margins than their competitors. Looking at ROA and ROE, Syngenta’s ROA only beats Du Pont, while their ROE only beat Monsanto. Taking a look at SYT’s five year revenue CAGR, the company ranks in the middle of their comparables, growing revenues on average at 10.50%.
Monsanto (NYSE: MON) is the largest company among the comparables with a market cap of over 48B. In 1996, Monsanto was the first company to introduce genetically modified crop seeds, and they remain the market leader today. Looking at the valuation, Monsanto has the highest P/E and EV/EBITDA, making it the most expensive among its comparables (click here to see Monsanto’s earnings analysis). Moving the ROA and ROE, Monsanto’s ROA ranks in the middle of their comparable, but they have the worst ROE at 18.17%. The agricultural giant has grown revenues on average at 10% in the last five years, only better than Du Pont.
Agrium (NYSE: AGU) is the largest agricultural retailer in the United States. With over 1,250 retail centers the Canada based company sells everything from fertilizers to seeds. The retailer is the cheapest among the comparables trading at 10.18 times their earnings with an EV/EBITDA of 6.12. Looking at their ROA and ROE, Agrium has the second highest ROA among the comparables at 10.74%, and the third highest ROE at 24.30%. The company has grown their revenues at a five year CAGR faster than any comparable at 29.80%.
Potash Corp (NYSE: POT) is the world’s largest independent potash producer. With a P/E of 14.53 and an EV/EBITDA of 9.72, Potash is more expensive than both Agrium and Du Pont. Looking at ROA and ROE, Potash has the highest ROA at 13.36%, and have the second highest ROE at 30.32%. The independent potash producer has grown revenues at a five year CAGR of 18.30%
E I Du Pont De Menours (NYSE: DD) is a diversified chemical company with products ranging from agriculture to electronics. With a P/E of 13.44 and an EV/EBITDA of 8.46, Du Pont is cheaper than every comparable other than Agrium. Moving to ROA and ROE, Du Pont has the worst ROA among their comparable at 6.52%, but they have the highest ROE at 30.46%. The diversified chemical company has grown revenues the slowest among comparables. Du Pont has a five-year revenue CAGR of only 6%.
To conclude our analysis of this industry, Part III will take a look at hedge fund sentiment surrounding its most popular stocks, and will employ Porter’s Five Forces framework.
This article is written by Mike Pate and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.