The fertilizer industry has been unattractive since 2013 when the Belarusian Potash cartel broke apart. Back in 2006-2012, investors used to gush over fertilizer companies. Potash, phosphate and nitrogen increase crop yields for growing populations and production is in the hands of a few producers. BHP tried to buy Potash Corp of Saskatchewan in 2010 but the Canadian government blocked it b/c the potash mines were too strategically important. The war in Ukraine is disrupting not only agricultural production, but also essential fertilizers in a major way.
Belarus and Russia account for 1/3 of global potash production which face sanctions and export logistics challenges due to the war. Norwegian nitrogen producer Yara Int'l had to curtail nitrogen b/c European natural gas shortages. Natural gas is the key input to make nitrogen fertilizer. China is a large phosphate producer and they halted exports last fall.
Farmers are beginning to plant their crops this spring and there's not enough fertilizer to go around. Crop yields are inevitably going to be lower and ag prices are headed higher. This is a problem for the world.
Nutrien (NYSE: NTR): 7.9x P/E (2022e EPS). Consensus EPS is $14.18/share for 2022. Free cash flow (Operating cash flow – capex) for 2022 is $7.2B, making for FCF yield of 10.0%.
Mosaic (NYSE: MOS): 6.5x P/E (2022e EPS). Consensus EPS is $11.72/share for 2022. FCF yield is also 10.0%.
CF Industries (NYSE: CF): 6.7x P/E (2022e EPS). Consensus EPS is $10.77/share for 2022. FCF yield of 13.3%
These are very low valuations and its real free cash flow being produced. Their competition is either facing sanctions, cannot get feedstock, is much smaller or is higher cost. K+S (KPLUY) is a German producer and Intrepid Potash (IPI) are also in this business but are second tier b/c of higher costs.
Nutrien is the largest, most diversified fertilizer producer. It's Potash Corp of Saskatchewan and Agrium, which make up 2/3 of the Canadian potash cartel, “Canpotex”. Nutrien also does nitrogen and phosphate fertilizer. They also have a retail distribution arm so its vertically integrated. Like OPEC and oil, Canpotex holds back production to keep prices higher but they will open higher cost mines to increase potash production.
Mosaic (NYSE: MOS) is the other 1/3 of Canpotex and is a major potash producer with its Esterhazy, Saskatchewan mine, the largest in the world. They also have a very good phosphate mining business in Florida.
CF Industries (NYSE: CF) is only a nitrogen fertilizer producer, but is the largest in the western world. Nitrogen is made from natural gas, so being in the United States they have low cost access to cheap, abundant natural gas so they are very well positioned on the global cost curve.
These stocks have rallied a lot recently, but (1) they trade at very cheap multiples and (2) their businesses have faced headwinds since 2013, primarily due to increasing supply which has unequivocally changed. A lot of that supply has been drastically impacted by war. If you think the war ends next month and all is forgiven with sanctions dropped, these may not be the stocks for you. If you're worried about the war and food inflation, you should consider these. Good luck.
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