Commodities & Metals

Has Ag, Fertilizer & Potash Finally Bottomed? (POT, MON, MOS, SYT, IPI, MOO, ADM, BHP)

Despite earnings warnings and lower guidance throughout 2009, analysts and investors chased up the potash and agriculture names due to the various potash and agriculture companies talking up forward shipments and an eventual recovery.  Much of the gains seemed almost to be chasing what could be related phantom gains of the past when potash players started getting valued on what felt comparable to the crazy tech and internet boom of 1999 and early 2000.  We are looking at Potash Corp. of Saskatchewan, Inc. (NYSE: POT), Monsanto Co. (NYSE: MON), Mosaic Co. (NYSE: MOS), Syngenta AG (NYSE: SYT), Intrepid Potash, Inc. (NYSE: IPI), Market Vectors Agribusiness ETF (NYSE: MOO), Archer Daniels Midland Company (NYSE: ADM) to see if a bottoming is happening, or if there is more downside to come now that these 52-week trading ranges are appearing more normalized than before.  It is time to differentiate here between value investing, growth investing, and trading opportunities.

Potash Corp. of Saskatchewan, Inc. (NYSE: POT) was upgraded on Wednesday to Buy from Neutral at UBS and the old $106.00 price target was lifted to $112.00 based on strong enough demand helping its volume and pricing into 2011. The case against this notion is the international slowing fears and perhaps another year of farmers pushing out the need for potash another year.  Shares are up with the stock market this morning and trading right at $99.00 versus a 52-week range of $80.85 to $128.42.  That high was just in March, so in under 3 months down to the low close this week of $94.29 it had fallen more than 26% before the latest recovery.  Thomson Reuters has an average analyst price target of $123.64 and the 2010 estimates of $5.44 EPS and 2011 estimates of $7.57 EPS give it a forward P/E of 17.8 for this year and 13 for next year.  While not super-expensive, this is still far from cheap.

Mosaic Co. (NYSE: MOS) is trading up over 4% today around $44.50 and its 52-week range is $39.39 to $68.28.  In short, it has lost more than one-third of its value.  The lowest this one got in recent weeks was under $43.00 and the lowest close this week was 442.52 from yesterday.  The Potash Corp. upgrade to Buy from UBS was yesterday, but Mosaic was raised to Buy at UBS back around May 24.  Thomson Reuters has an average analyst price target of $65.47 and the 2010 estimates of $1.98 PS and 2011 estimates of $3.87 EPS give it a forward P/E of 22.4 for this year and 11.5 for next year.  The big problem here is that you have to trust an expensive forward multiple for this year to get to a dirt cheap multiple for 2011.

Intrepid Potash, Inc. (NYSE: IPI) is up over 4% today around $22.00, and its 52-week range is $21.00 (yesterday) to $34.20 (January).  It just recently gave guidance showing sales data for the first two months of this quarter that revealed weak industrial sales indicating that the purchasing decisions had been made.  Its tonnage estimate was also under expectations at 99,000 short tons of potash at an average price of $370 to $375 a ton.  While the quarter is not out, the earlier quarter was 243,000 tonnes.  Thomson Reuters has an average analyst price target of $28.33 and the 2010 estimates of $0.87 EPS and 2011 estimates of $1.51 EPS give it a forward P/E of 25 for this year and 14.5 for next year.  Despite losing one-third of its value since January and  despite this potentially offering the biggest chance of upside and downside surprise as it is the smallest of those covered today, this one is far from cheap.

Syngenta AG (NYSE: SYT) is a Swiss company so we won’t be providing estimates from analysts in dollar terms.  At $46.00 today on a near 3% gain, the 52-week range is $42.96 to $46.22.  Thomson Reuters lists an average analyst target of $59.43 on the ADRs, although we’d caution against using dead-set targets on ADRs.  With much concern about Europe, that has to be considered despite that this is a Swiss company doing business globally even if the Swiss are not at all a part of the Euro.  It was just last week that Credit Suisse raised the prior neutral rating to an Outperform rating.

Monsanto Co. (NYSE: MON) on the seed side just this week authorized a $1 billion buyback versus what is now about $27 billion in market cap, and it gave a $0.265 quarterly dividend that now has a yield of about 2.1%.  With shares up 2% at $50.00 today, the 52-week range is $48.16 to $84.70.  That low was just in May and the company’s stock had nearly lost half its value from peak to trough.  Monsanto executives also gave loose guidance saying it is positioned for earnings growth in the mid-teen percentages beyond the current fiscal year, but that is after some lower guidance two weeks ago.  Last week, Goldman Sachs raised the rating to Buy with a $65 target with a note that the bad news is exhausted.  Thomson Reuters has an average analyst price target of $62.16 and the 2010 estimates of $2.64 EPS and 2011 estimates of $3.25 EPS give it a forward P/E of 18.9 for this year and 15.4 for next year.  That is not crazy expensive, but is far from cheap today just on a raw forward P/E computation.  One reason the multiples are high is because there are issues inside its operations and it should be considered more of a turnaround stock.  To put the current price perspective, Monsanto never traded under $60.00 during the peak share crash selling in late 2008 nor in early 2009.

Archer Daniels Midland Company (NYSE: ADM) is more of an end-user and it the food company of the world rather than the potash and fertilizer company of the world, which is why it is being featured last in the lot here.  At $25.25, its 52-week range is $24.22 to $33.00 and that low was put in at the end of May.  Also at the end of May it was noted by Morgan Stanley that the stock was effectively already trading at the bearish-case of its estimates.  Its dividend yield is now 2.4%, and it is valued at far different metrics than the rest of the companies covered today.  Thomson Reuters has an average analyst price target of $35.33 and the 2010 estimates of $2.87 EPS and 2011 estimates of $2.89 EPS give it a forward P/E of roughly 8.8 for both this year and next year.

Market Vectors Agribusiness ETF (NYSE: MOO) is still fairly new and it is less active than back when all the potash stocks were on fire.  At $38.00 today after a 3.5% gain, the 52-week range is $31.81 to $47.90.  The companies noted here make up more than 35% of this ETF.  The issue here is that the ETF also has machinery makers and tracks the DAXglobal Agribusiness index investing in equities of both US and international companies which derive at least 50% of their total revenues from agribusiness.

After reviewing these stocks in the sector,  the good news is that these are down in price more than the broad market indexes in most cases.  The bad news is that the valuations are not sending out any Screaming-Buy signals today.

SECTOR & GLOBAL RISKS

So what else are risks to the sector other than currency and a possible slowing recovery?  Estimates from companies themselves in the agriculture, fertilizer, and potash companies are often far different from what reality is.  When things are booming the executives speak of how another 1 billion people are moving from one meal per day to two.  When they lowered estimates and production and shipment and sales price per tonne targets all through last year, analysts kept upping the stocks based upon management’s promises of higher shipments and the belief of higher pricing ahead.

The risk of currency cannot be ignored here with most of the prices being in dollars.  That could make even slightly weak pricing expensive in local currency terms to European buyers and buyers elsewhere.

Another risk here is BHP Billiton plc (NYSE: BHP) with its entry into potash.  The company wants to develop its potash projects in Western Canada into a world-class potash basin, and a company this size (approx. $180 billion market cap) has extensive resources that it can allocate in competition.  But a interesting notion is that BHP has also been a rumored buyer of potash companies.  Whether that is ever the case and whether it could ever get a buyout approved is another situation, but that alone could keep a valuation-premium alive in the sector just as much as the comparisons to the old highs during the boom.

“CHINDIA” is a risk, and opportunity…. In 2009, it was India that at one point was able to do a large transaction that kept potash and fertilizer prices subdued.  And China, you already know how powerful it can be if it merely decides to arbitrarily stay out of the market or if it says it is delaying orders.  With roughly one-third of the global population, these two countries are feast or famine for agriculture, fertilizer, and potash players.

Valuations have come down, and the economic impact of the Euro and a potential growth slowdown remain the biggest factors today.  The risk of competition seems as though it could be counter-balanced by the notion that the competition could just as easily lead to further consolidation.

After looking at everything above, the sector appears as though it is trying to find a bottom.  Still, memory is short in the market today.  The safe bet for now is that any aggressive buying in this sector should only be on weakness rather than in any manner of chasing stocks.

JON C. OGG

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