Join Jill Malandrino and Bob Lang on Wednesday, March 13 at 6pm ET. Learn all about the key trends and themes in their favorite space, get Jill and Bob's top stock picks and how to use basic options strategies to trade heading into a key time of year for the Ags.
We will run through the presentation for 30 minutes and dedicate the remaining 30 minutes to an interactive Q&A session.
This is the time of year to start thinking big on fertilizer names. In the past we have been on this theme and it continues to be one of the best trading/investing opportunities on the 'street. In recent years some uncertainty has caused some volatility in some of these names but for the most part the direction arrow has been pointing upward. Spring is the best time for fertilizer names as crop estimates for the year are becoming clear. Let's take a look at these names today and find out what may be in store for the rest of 2013.
The top names in the fertilizer space have had strong relative outperformance over the last few years due to strong demographic trends, declining costs and solid demand. By demographics we are talking about a large and growing World population, likely to reach 7 billion by the end of this decade. The demand for soy, corn, wheat and others should remain robust for years to come as the population expands. The eastern part of the world, which contains nearly 35% of the world population are big consumers of planted commodities like soy, rice, corn and wheat. Hence, the need to put seed in the ground, buy more fertilizer and deliver product to market.
China and India are big fertilizer consumers and recently locked in rates for 2013, a sign of stability for the fertilizer companies. Knowing where the demand lies and having control over production out to a year is huge for companies such as Mosaic(MOS) and Agrium(AGU).
Predictability allows a company like MOS to better predict earnings and growth for future quarters. This company is one of the best levered to the business with a solid balance sheet, good dividend payout (which may increase again in coming quarters) and owns several rich phosphate deposits in the US. Fundamentally, MOS sports a modest 14x p/e, a decent PEG and nearly a 2% dividend payout, but prospects are strong for that to increase. The recent high in the $80 area from 2011 is certainly achievable this year, especially if anchored fertilizer prices gain some ground over the next few months.
AGU is another name that has tremendous leverage and has demonstrated consistency as a leading fertilizer provider. It provides an array of products from herbicide, insecticide, fertilizer inputs (potash, phosphate and nitrogen) and other services. The company has benefited recently from a low cost structure and strong margins as fertilizer prices remain strong. The recent long-term commitment by China and India for buying fertilizer at $400 per MT or more signifies the ability to sell at a good price. Simply put, the floor price is in place.
Recent earnings by AGU showed good growth in revenues and earnings with bullish prospects through the remainder of the year. The stock is not far from an all-time high of $115, or so, just seen recently. Fundamentally, at less than 11x P/E (cheap by historical standards), a 2% dividend payout and heavy institutional sponsorship this company is poised for a big move in 2013.
Genetically modified seeds have become commonplace in agriculture, which now grows more than 250 million acres of crops that have had their DNA combined with that of another organism. Monsanto (MON) is a leader in that space, with only two companies that can be considered true competitors -- fellow chemical manufacturers DuPont(DD) and Syngenta(SYT), which both also offer genetically altered seeds in addition to herbicides and other chemical products.
MON's strengths lie in its low debt and high margins. Just take a look at some of the metrics: gross margin at 56.88% vs. industry average at 37.07%, operating margin at 24.31% vs. industry average at 16.01% and pretax margin at 23.19% vs. industry average at 13.91%, while revenue grew by 20.5% during the most recent quarter. Its ability to continue generating revenue -- even as earnings waver seasonally (which is the norm for the ags) -- is too incredible to ignore.
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