What do investors do when a couple of good sets of numbers are followed by a two equally distasteful reports? They are left confused. This is exactly what happened to those who have money locked in some big fertilizer stocks.
After Mosaic Co (NYSE:MOS)‘s and Potash Corp./Saskatchewan (USA) (NYSE:POT)‘s impressive quarterly numbers, investors’ expectations from CF Industries Holdings, Inc. (NYSE:CF) and Agrium Inc. (USA) (NYSE:AGU) unsurprisingly ran high. While CF’s stock gained 4% in the week prior to its earnings announcement, Agrium’s stock tacked on 6% before release. Unfortunately, expectations fell flat on their faces. The result: All four stocks have stopped short in their tracks, leaving investors sulking. The $64,000 question is: What should investors make of the situation and what should they do now?
Same time, different situation
Both Agrium Inc. (USA) (NYSE:AGU) and CF Industries Holdings, Inc. (NYSE:CF) reported double-digit slump in revenue year on year in their respective last quarters. In sharp contrast, Potash Corp./Saskatchewan (USA) (NYSE:POT) reported a solid 20% jump in top line for its first quarter. Mosaic Co (NYSE:MOS) had a softer 2% growth in sales, but its earnings grew at 26% clip year on year. What did Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic do right that the others didn’t? Nothing. It was all a matter of how different things were the same time last year.
Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS) rely on potash and phosphate nutrients for revenue, both of which are key export products. The two companies are leading members of the legal cartels Canpotex and PhosChem, which control the export of potash and phosphate, respectively. So their sales, to a great deal, depend on international markets. With China and India putting fresh contracts on ice last year on pricing issues, these companies had a tough time moving inventory and generating sales.
This time around, they had a couple of contracts to work on. North American potash producers recorded a staggering 74% jump year on the year in offshore shipments during the first quarter. Naturally, year-on-year comparisons looked great for Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS).
Agrium and CF depend more on the North American market for sales. Exceptionally warm weather last year resulted in a surge in demand for nutrients as farmers in the U.S. rushed to plant earlier than usual. CF’s Q1 2012 revenue surged 30% while Agrium reported a sparkling 35% rise in revenue for the same period. It was a record for both companies. With the weather in the U.S. back to normal this year, the first quarter turned out to weak for both companies, just like it should have.
So investors shouldn’t read much into the recent misses and beats. Instead, they should focus on what’s in store. Fortunately, there’s some good news here.
Why you should buy
Expectations about this year’s spring planting are shooting to the moon, with both CF and Agrium pitching for record planting of corn and soybean. CF’s order book at the end of the first quarter was heavier by $700 million compared to the year-ago period, indicating solid demand for nutrients. These companies should be doing brisk business right now, especially because both derive a major chunk of revenue from the most widely applied nutrient — nitrogen. CF even operated its ammonia plant at 100% capacity this past quarter in anticipation of robust demand. Meanwhile, prices of nitrogen are expected to firm up. Rising revenue should also help the companies offset higher costs of a key input — natural gas — in the event that gas prices move further up.
So which is it, CF or Agrium?
Agrium can make a lot out of a good planting season as it also sells seeds and crop protection products. Yet, the company’s outlook doesn’t seem to reflect any of the optimism. Agrium has provided an unusually wide range of $4.60-$5.40 earnings per share for the second quarter, which is uninspiring given that it earned $5.40 per share in Q2 2012. The tepid outlook is one reason why the stock lost ground post earnings announcement. But I think the pessimism is already baked into the stock price, and investors should consider initiating long positions at current level.