A Fertile Play from Norway

Input costs are a concern for a fertilizer company, but Yara's access to low cost natural gas in the Middle East allows the company to stabilize the cost of its energy inputs. Ammonia is necessary for the production of urea, which is then processed into urea-based fertilizer. Phosphate rock, to which Yara will have greater access due to the Finnish acquisition, is one of the essential ingredients in calcium nitrate and ammonium nitrate-based fertilizer.

Moreover, the company has just entered into a joint venture with the Libyan Investment Authority to develop fertilizer and industrial products in that country; no doubt an important consideration for Yara was having preferential access to that country's substantial oil reserves.

Yara is directing most of its capital expenditures to upstream activities. This segment has the lowest EBITDA growth and the greatest cyclicality. Despite the growing presence of China as an urea exporter, which serves to cushion urea prices, a smaller player such as Yara will need to secure supplies in ammonia and phosphate production (from its upstream activity), in recognition of considerable volatility in the supply of these materials.

Yara	Metrics
Downstream depreciation growth	-3%
Industrial depreciation growth	4%
Upstream depreciation growth	17%
Downstream investment growth	-60%
Industrial investment growth	133%
Upstream investment growth	332%

As seen in the following graph, Yara's shares have surged in recent years. That's likely due to the 49% jump in profits last year. The stock sports a 1.3% dividend yield, and trades at a comparatively rich 41.5 times free cash flow (compared to 37.2 for the peer group), I consider it a sweet buy, without any hesitation.

Yara International

Source: http:// finance.yahoo.com

Yara's support seems to be $30, but I see the six month appreciation potential to around $70 -- or higher. On the negative side, the company has also increased its net indebtedness by 67%, and reports a fairly high debt-to-capitalization ratio of 43%.

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Vasu Vijayraghavan holds a long position in Yara. She was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.

Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.

Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.