3 Fertilizer Companies Favoring Expansion

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

Editor's Note: This article has been amended to more accurately reflect the details of Potash Corp's dividend and future plans. Motley Fool apologizes for the errors.

The world population is expected to increase from 7 billion in 2012 to about 7.2 billion in 2014. With the increase in population, the global demand for agricultural products is on the rise. To increase the quantity of the agricultural produce, the quality of soil needs to be enhanced by efficient farming practices. This creates a huge opportunity for fertilizer companies.

Looking at these opportunities in the agricultural sector, I have chosen three companies that are using advanced technologies to produce high quality fertilizers to increase their market share.

Creating a monopoly

Monsanto (NYSE: MON) and its rival DuPont (NYSE: DD) collectively hold more than half of the U.S. seeds market, amounting to $34 billion. Both companies entered into a new licensing deal in March 2013. This deal will create a monopoly in the seed industry, resulting in higher revenue for both. Under this deal, DuPont will pay a royalty of $1.75 billion for 10 years to Monsanto, and will get a license to sell its “Genuity Roundup Ready 2 Yield” in the U.S. and Canada by 2014. By 2015, DuPont will also be able to sell “Genuity Roundup Ready 2 Xtend,” after it receives regulatory approval.

Genuity Roundup Ready 2 Yield is designed to provide farmers additional herbicide tolerant soybean, and Genuity Roundup Ready 2 Xtend provides the highest production opportunity to produce more beans. Under the deal, Monsanto will also have access to DuPont's disease-resistant and corn-defoliation patents.

Monsanto generates 60% of its revenue from genetically modified organisms, or GMO seeds. In GMO, the DNA of a seed is modified to produce a high-yielding, fertile plant. The crops grown from GMO seeds are considered unhealthy, but the company has the shield of the Monsanto Protection Act, which prevents the U.S. government from banning the consumption of genetically modified crops.

The company’s total revenue increased by 15% year-over-year to $5.47 billion in the quarter ending February 2013, which was mainly driven by the sales of GMO seeds in emerging markets like Brazil, Argentina, and other Latin American countries. In a one-year period, the company has witnessed an increase of 14% in the total annual revenue of $13.5 billion in the fiscal year 2012, with the help of the GMO segment.

On the path of continuous growth

Mosaic (NYSE: MOS) is planning to take over Cargill, a privately owned company, from which Mosaic was split-off in 2011. Cargill has 286 million Mosaic shares, which include the 129 million shares owned by its Charitable Trust. Mosaic shares were allotted to the trust, with a lock-in period of two years, ending on May 26, 2013. After the end of the lock-in period, the takeover will be tax-free for both the companies and their shareholders. Mosaic has more than $7.3 billion cash available at present for the deal.

Cargill witnessed 1% year-over-year increase in its total revenue, amounting to $32.2 billion in the third-quarter of 2013, and had reported 12% year-over-year increase in revenue, which totaled $133.9 billion in the fiscal year 2012. The earnings of Mosaic’s investors are expected to increase after the acquisition.

Furthermore, there is an expectation that Potash sales will rise to more than 2.3 million tons in the fourth quarter of 2013, from 1.8 million tons in the third quarter. This increase is driven by the global potash demand, most of which is coming from India and China. India has lowered its subsidy for potash, as the Indian currency is continuously falling. Still, the country cannot reduce its demand, as potash is needed for growing wheat, rice, and sugarcane, of which India is the second largest producer. In order to meet the growing demand, Mosaic has planned to spend $2 billion for expanding its production capacity of potash by 2 million tons every year at its Belle Plaine mine and Colonsay mine, located near Regina and Saskatoon.
The company is aiming to increase its production by 50% a year to 16.5 million tons by 2021. Mosaic has reported a 37% year-over-year increase in sales from the potash segment amounting to $758 million in the third quarter of 2013.

Concentration on increasing production

There is a rise in the global demand for potash, but the reduction in the Indian subsidy on potash will act as a headwind. This will partially be offset by the demand from North America to meet farmer’s requirement during spring. Potash Corporation (NYSE: POT) expects demand to rise to more than 55 million metric tons, or MT, in 2013 from 51 million MT in 2012. With the expectation of increasing demand, the company increased its production of potash by 25% year-over-year, which amounts to two million tons, in the first quarter of 2013. The increasing demand of potash increased the total earnings by 13% year-over-year to $556 million in the first-quarter of 2013. The company expects potash sales to rise approximately to $3.59 billion in 2013 and $4.31 billion in 2014.

The increased demand brings tremendous opportunities for the company.  With higher sales, Potash Corporation expects growth in its free cash flow, or FCF, from $624.78 million in 2012 to almost $1.6 billion in 2014. It has already declared a 25% increase in its quarterly dividend, amounting to $0.35 in the second quarter of 2013, payable on August 2, 2013. The annual dividend will amount to $1.40 per share in 2013. The dividend yield of the company is approximately 3.2%, which is higher in comparison to its peers like Mosaic with 1.6%, CF Industries Holdings with 0.8%, and Agrium with 2.2%.

Monsanto has entered into a deal with DuPont, where it will receive royalty for its technologically advanced fertilizers. Moreover, GMO continues to drive higher revenue for the company.

Potash Corporation plans to add capacity to meet the increasing demand of potash which will drive its revenue higher. Also, the expected higher cash flow in the future will help increase the returns to the investors.

I recommend buying all these three stocks.

With less and less arable land available around the world, increasing yields from existing plots could become vitally important to keeping up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has established several barriers to entry that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's premium research report that covers precisely what these barriers to entry are and details several other key reasons why PotashCorp presents such a compelling investment opportunity today.

Shweta Dubey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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