How These Farming Stocks Will Perform in 2013
Madhu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Last year wasn't ideal for agriculture, as the U.S. faced its worst drought, in decades. However, the situation seems to be changing now. A winter storm in the southern plains should provide some relief and neutralize the impact of the drought to some extent. Consequently, improving weather conditions have led the U.S. Department of Agriculture to expect a decline in crop prices. Let's look at how 2013 may play out for three agricultural stocks, and see whether their long-term fundamentals remain intact.
Rentech Nitrogen Partners (NYSE: RNF): Expansion through acquisition
Unscheduled downtime in the fourth quarter of 2012, and a biannual turnaround at its East Dubuqe refinery, may lower Rentech's near-term nitrogen production and shipments. Consequently, its organic production and sales guidance seems a bit weak. But its $158 million acquisition of fellow fertilizer maker Agrifos, which gives the company increased capacity for urea and ammonium sulfate production, should stabilize its profitability prospects.
Agrifos is one of the top three producers of ammonium sulfate (AS) and AS fertilizer in America. Agrifos is located on the Houston Ship channel, having access to different modes of transportation that link the facility to the world’s top two AS-consuming countries, the U.S. and Brazil.
Additionally, the payment terms of the acquisition include an earn-out option capped at $50 million. The earn-out is based on the adjusted income for the next two years. For every dollar earned by Rentech after reaching the limit of $55 million, two dollars will be paid as additional compensation. For the next two years, the expected adjusted earnings from the acquisition are around $80 million.
This acquisition also provides Rentech with a hedged position that involves lower Tampa-linked prices and higher Mid Corn Belt-linked prices. This should help Rentech reduce its exposure towards the volatile AS prices.
Though the near-term conditions may not look promising because of the downtime and turnaround expenses, the long-term position of the company looks strong because of its inclination towards ammonia sulfate.
CVR Partners (NYSE: UAN)
The earnings and revenue of CVR Partners for the fourth-quarter of 2012 surpassed the consensus estimate. But even after this, the result came along with bad news. The company's adjusted EPS and revenue lag behind last year's figures by around 60% and 23% respectively. The decline was massive, but as it turns out, the Street’s expectations were worse. The weakness in the fourth quarter was mainly due to the biennial turnaround at its fertilizer plant in Kansas. At least the company won't have to endure any more downtime for the next two years.
The additional capacity for higher production of urea ammonium nitrate at its fertilizer plant is already installed, under the company's expansion project. The project is expected to increase the production level by 3000 tons/day, extending the annual capacity of the company to 1 million. The production will start in March 2013, which is around three months later than the announced target. The delay reduces the overall cash generation capacity of the company for 2013, but the strength in the product’s prices in recent month builds my faith for future growth in cash flows.
Until the end of 2014, CVR doesn't have any turnaround-related downtime. And the expanded capacity along with the better pricing of urea ammonium nitrate should aid the company's performance in the future. Although the cash flow will be less than expected in 2013 because of the delay, the road from there on doesn't seem that rough.
Mosaic (NYSE: MOS): Will the deals help?
Mosaic reported a diluted EPS of $1.47 in the second quarter of 2013. However, on a closer look; I observed a drop in the adjusted EPS by 25% year-over-year. The good news is that it was still $0.12 above the consensus estimate, entirely because of the lower-than-expected tax rate. As for the other parameters, the situation is shaky.
Sales fell by 16% because of the low volumes of phosphate, potash, and also the weak pricing of phosphate. The company's guidance for the third quarter is also not very promising, either, predicting weakness due to that low pricing. However, its subsidiary Canpotex has entered into a deal with a Chinese company, Sinofert, to supply about 1 million tons of potash.
Mosaic's volume exceeded analysts' expectations, but low price per ton on a cost-and-freight basis neutralized the benefits. This indicates that the industry has a surplus products, and that currently, a buyer's market prevails. Some relief is expected from the recent deal for Canpotex to supply India with potash. But the weakness in prices of phosphate and potash will also limit that deal's upside.
I do see a ray of hope this coming May, when the restriction on shares held by Cargill is lifted. In 2004, Mosaic separated from Cargill. Two years back, Cargill sold most of its holdings in the company, but because of legal requirements, it still holds 129 million shares of Mosaic, with a restriction on public trading. In May 2013, the restriction on one-third of these shares will be lifted. Chances are, Mosaic could initiate a buyback plan to increase the return for its shareholders.
The Canpotex deals with China and India can help this company's weak guidance, but the shakiness and feeble pricing in its market could be difficult to conquer. I'll recommend a hold for the stock until the company issues any information on a possible buyback.
Rentech will face some downtime because of its biannual turnaround, resulting in weak production. But the acquisition of Agrifos seems a good investment for the company, expanding its reach and portfolio.
CVR has also finished the construction of its expanded facility. Its production is delayed, affecting its cash generation, but both factors will get back on track for the rest of 2013. Given the expansion plans, I am optimistic about both Rentech and Agrifos in the future.
As for Mosaic, the situation is still foggy. Weaker pricing and downtime explained its shaky performance in the past, and its future pricing doesn’t look very promising, either. The deal with India, China and the possible buyback give a ray of hope, but for now, I'll give the stock a hold.
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