3 Fertilizer Stocks That Could Win Big on Earnings

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Yet another terrible set of numbers, and a roll back in full-year guidance. Sigh, this is proving to be one of the toughest earnings seasons. But a bad earnings report, apart from disappointing me of course, has also taught me one thing – it pays to be informed, and prepared.

I always try to do a back-of-the-hand calculation of what to expect from a company before it releases its quarterly numbers. Which is why in case of a company like PotashCorp (NYSE: POT), miserable numbers didn’t catch me off-guard. Knowing what the situation in the industry currently is, it was expected. 

But that’s not the key takeaway I’ll leave you with. The potash leader’s report gave me a good idea of not only what to expect from it in the coming months, but also from peers waiting around the corner with their earnings report – something I’m sure will help you too as an investor.

When Fall Rises

After the devastating drought, no one really knew which way fall fertilizer applications would head. PotashCorp had earlier aroused hopes when it expected ‘significant fall fertilizer applications.’ Well, its third quarter somewhat proved it right.

U.S. potash producers shipped 26% more during the third quarter compared to the same period last year, proving how domestic demand for the nutrient far exceeded expectations. Mosaic’s (NYSE: MOS) last-quarter potash segment sales too increased 10% from the year-ago period as sales volumes firmed up. PotashCorp’s own North American potash sales volumes hit a record third-quarter high of 1 million tonnes, up 25% from the comparable period last year. Selling prices remained flat for both companies.

This also raises the bar for Agrium (NYSE: AGU), which should suit up with its earnings in about a week’s time. Till its second quarter, the company didn’t appear too upbeat about fall demand. But its latest market report revealed a 27% sequential rise in potash produced in North America in September, indicating improving demand. Although potash accounts for less than 10% of Agrium’s total sales, higher domestic demand as PotashCorp has revealed could also help lift Agrium’s numbers.

Positive Vibes From South

PotashCorp’s earnings release also revealed the status of things in Latin America – the market that is into its peak planting season and is thus bearing the burden of all hopes. Thankfully, news from the nation is good.

Latin America accounted for a major chunk (32%) of total Canpotex shipments during the third quarter. Canpotex is the three-member legal cartel comprising PotashCorp, Mosaic and Agrium, that controls all potash exports out of Saskatchewan, Canada. Being the largest stakeholder, whatever PotashCorp says holds immense importance.

PotashCorp reported much higher shipments to Latin America in this past quarter compared to last year, which means all those banking on the nation can heave a sigh of relief. CF Industries (NYSE: CF), for instance, should have benefited from robust Latin American demand too in its past quarter. In fact, PotashCorp’s third-quarter earnings report brings more good news for CF than one.

CF Should Smile…

CF is primarily a nitrogen player and derives more than 80% of total sales from the nutrient. Interestingly, PotashCorp’s nitrogen division was the outperformer in this past quarter. Volumes were good, and while selling prices of both potash and phosphate trailed last year’s, nitrogen commanded 8% higher prices during the quarter. CF had one heck of a second quarter, with revenue as well as profits hitting record highs. With fall fertilizer demand exceeding expectations and prices remaining firm, one can comfortably expect good third-quarter numbers from CF, which will be out in about a week’s time.

…and so Will They

Again, this is also a heads up for investors of two other companies – Agrium and CVR Partners (NYSE: UAN). Agrium depends more on nitrogen than on potash or phosphate. So if its second-quarter nitrogen gross margin surged 50% from the comparable period last year, it might be just as good in the third quarter. Only, natural gas (key input for nitrogen fertilizer) prices have firmed, which could puncture the excitement a bit.

As for CVR, robust demand for nitrogen should be great news as it’s a pure-nitrogen player. Its second quarter wasn’t too great, with revenue remaining flattish and profits decreasing 8% year-on-year. But that was mainly due to high input costs (CVR uses pet coke instead of natural gas), and the company appeared visibly optimistic about its third quarter as pre-fall orders flew in fast enough to cover almost all the ammonia it would produce over the next two quarters. PotashCorp’s great nitrogen division performance only gives CVR investors another reason to get excited about its earnings scheduled for an early November release.

An Unavoidable Hurdle

PotashCorp’s earnings call further told us something that’s critical for fertilizer companies, particularly for Canpotex members – that fresh contracts from major buyers India and China are nowhere in sight. So important are these markets that delayed contracts even compelled PotashCorp to cut its full-year earnings guidance to $2.40 and $2.60 per share from the earlier projected $2.80-$3.20 per share. If PotashCorp’s investors are sulking, others need not panic, as PotashCorp depends more on Canpotex sales than anyone else. Only Mosaic might have a tough next quarter as most of its potash sales are made through Canpotex, and nearly 14% of its sales come from the Indian market alone.

The Foolish Bottom Line

PotashCorp’s slashed outlook might not leave much to be excited about, but it could help shape expectations from other fertilizer players about to release their numbers. I will soon give you details on where analyst estimates for each of these companies stand, and what you should be expecting. To make sure you do not miss it, add the following stocks to your watchlist.

Click here to add CF Industries.

Click here to add Agrium.

Click here to add CVR Partners.

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. 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.

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