Time to Consider Fertilizer for Drought Relief?
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Corn is up over 33%. Soybeans are up over 15%. The drought of 2012 has been compared to the Dust Bowl in the Dirty Thirties, the worst since 1956, covering over two-thirds of the United States, sending corn prices over $8 a bushel. The water levels along the mighty Mississippi River are so low that barges are currently forced to carry 25% less of their normal cargo so that the ships travel higher on the water. The events of this summer have many speculating we could see corn go over $10 a bushel by spring 2013.
Typically, when corn prices rise, fertilizer stocks go along for the ride. And while some in the sector have enjoyed positive movement this year, there are some conditions to take into account before considering investing in the fertilizer space.
Agrium, Inc. (NYSE: AGU), the largest retailer of agricultural goods and services for the U.S., Canada and Mexico recently reported record profits for their second quarter. The company started the year around $71 a share and has hit new annual highs, sending their year-to-date performance well above 35%. The fresh highs could be the result of recent upgrades, with price targets over $110 a share. The company pays loyal shareholders a 1% dividend yield of $1 per share yearly, which is unfortunately subject to a foreign tax for those of us in the states, as company HQ resides in Calgary.
CF Industries Holdings, Inc. (NYSE: CF), has moved along nicely this year as well, up 36% over that clip since starting 2012 just under $154 per share. CF is at the high-end of their 52-week range ($115-$215), currently, with price targets projected around $230. The company was the beneficiary of Agrium scrapping plans to purchase a sizable stake in a nitrogen plant, which will increase their annual production capacity of nitrogen (425K tons of ammonia, 275K tons of urea). CF pays shareholders a yearly $1.60 per share dividend, but given the current share price, the yield is a scant 0.8%.
Canadian cousin, Potash Corp. of Saskatchewan, Inc. (NYSE: POT), has been a year-to-date laggard in terms of performance relative to their peers, up just over 2%. The company trades at the low-end of their 52-week range ($37-$60), with price targets anticipated around $53 a share. The price-to-earnings ratio is higher among the companies discussed, currently around 15. The company offers a 56-cent annual dividend payout, yielding 1.3%, but gets a foreign tax scalping before making its way to American shareholders.
The more intriguing of the bunch is The Mosaic Company (NYSE: MOS), which trades close to the middle of their 52-week range of $44-$74 per share. The company is up over 10% for the year, and shares moved up nicely after the company reported an earnings beat and doubled the dividend (the second increase in a year). Current share prices put the yield at 1.7%, paying shareholders a shiny quarter for every share owned each quarter. For those that give credence to price targets, Mosaic appears to have the biggest upside, with analyst estimates around $84. It’s possible the lofty goals being set are considering the potential for a share buyback announcement, with the restrictions from the Cargill spin-off set to expire next year.
Taking into account the year-to-date performances with these companies in the sector, in the face of current drought conditions over a majority of the country, I am a bit apprehensive. Just because some farmers may be giving up on their crops doesn’t necessarily mean they have the capital set aside for taking a big chance next year, even with crop insurance. The demand for fertilizer could fall considerably if fewer crops are planted. Even Agrium CEO, Mike Wilson, stated a slight decline in fertilizer purchases could be coming this fall. It may be a little late to consider an entry at this point along the ride, and it might be wise to let these stocks relax and make a little rain for investors later. Hopefully the farmers and their struggling crops see the rain much sooner.
Motley Fool blogger Kyle Metivier has no positions with any of the companies mentioned. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. 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.