4 Fertilizer Companies to Add to Your Watch List

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

Global food consumption will steadily increase over the long term as emerging economies industrialize. As the demand for food increases, so will the material used in food production, namely fertilizer. Outlined below are four fertilizer companies to add to your watch list.

Potash Aristocrats

Farmers utilize potash, a product mined from natural mineral deposits, as a natural fertilizer making it a needed product. This fact serves as a catalyst for future bottom and top line growth as increasing global food demand puts a strain on limited supply.

Potash (NYSE: POT) leads the potash market with “20% of the global capacity.” The mineral comprised 44% of Potash’s sales in its most recent quarter. Potash also sells phosphate and nitrogen based fertilizers.

Potash operates in a need based business with high barriers to entry. It typically takes 5-7 years and billions of dollars to get a facility online. Also, Potash claims readiness in meeting anticipated increased demand with its infrastructure. This, along with global supply dominance, spells catalyst for long term revenue and free cash flow growth, translating into superior long term returns for shareholders.

Potash hit a temporary rough spot in the global markets. Hesitancy from India and China to renew contracts with North American potash producers put a temporary crimp in Potash’s revenue and free cash flow; declining 8% and 29% respectively versus the same time last year.

Dec. 31 Chinese fertilizer distributor Sinofert reached an agreement with Canpotex, an offshore marketing company owned by Canadian potash producers including Potash. This increases 2013 market potential for global potash producers, especially for Potash, given the structural advantage highlighted above for that company.

India subsidies have steered market demand away from potash for the time being. The potash industry currently takes a wait and see stance on this particular market.

Potash currently trades at 16 times trailing 12 months earnings with a 2% dividend yield representing a good entry point for this stock.

While Potash dominates the global potash scene, Intrepid Potash (NYSE: IPI) dominates domestic capacity. Intrepid Potash’s capacity meets 9% of the 15% in domestic demand. According to Intrepid Potash’s investor relations website the United States imports 85% of its potash needs.

Intrepid Potash benefited from robust domestic demand with revenue growth of 14% in its most recent quarter. This contrasts with the revenue decline noted with Potash. Intrepid Potash’s excellent balance sheet positions it for future investment in growth and for weathering cyclical downturns in the market. Its total debt to equity ratio stands at an amazing 8%!

Intrepid Potash’s future looks bright. A strong balance sheet combined with increasing prices for crops such as soybeans and corn bodes well for this company in 2013. In addition, a larger company such as Potash could conceivably acquire this company at some future point.

Recently, Intrepid Potash’s stock price saw a sizable increase. It sports a slightly higher valuation than Potash with a P/E of 17.

Income to Fertilize Your Portfolio

Two fertilizer companies organized as master limited partnerships, a publicly traded partnership, can serve to provide the potential for income and capital appreciation. Generally, a master limited partnership distributes most of its cash flow to its “unit holders” in the form of a dividend distribution. For this reason, a master limited partnership sports a high dividend yield ranging into the double digits.

CVR Partners (NYSE: UAN) was formed by CVR Energy for the purpose of producing nitrogen fertilizer. CVR Partners utilizes petroleum coke and is the only one of its kind in North America to produce nitrogen fertilizer.

In the most recent quarter, CVR Partners benefited from price increases for ammonia. The price of urea ammonium nitrate (UAN) declined, offsetting some of that benefit. A unit in CVR Partners currently yields roughly 8%. In its most recent quarter revenue and net income declined slightly and it declared a dividend distribution of $0.496 per unit.

CVR Partners, like Intrepid Potash, expects a robust 2013 due to high corn prices and a strong spring planting season.

Currently, CVR Partners’ P/E ratio stands at 14.

Terra Nitrogen (NYSE: TNH) also produces nitrogen fertilizer. Its stock market performance over the past 10 years earned this master limited partnership a No. 3 spot in the Motley Fool article, “The Market’s 10 Best Stocks” returning over 10,000% for 10 years ending Dec. 7 beating Apple’s 7,000% during the same time!

The decline in sales volume of ammonia and UAN as well as price declines for UAN contributed to a fall in revenue and earnings. “Mark to market gains” in natural gas derivatives as well as a general decline in natural gas costs combined with an increase in ammonia prices cushioned the fall.

Cash distributions currently amount to an 8% dividend yield. If the spring growing seasons plays out as expected in this industry its unit holders will continue to be rewarded.

Currently, Terra Nitrogen’s P/E ratio stands at 14.

Conclusion

In brief, given new contracts with the Chinese, potash producers should see some recovery in global demand. Furthermore, growth for all aforementioned producers will compound even more if the robust domestic demand scenarios play out as anticipated. In that event, the master limited partnerships will reward unit holders with capital appreciation and distribution income. The fertilizer companies above will be added to my Motley Fool Watch list.


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