What To Expect From Fertilizer/Ag Names During Q4 Earnings Season

• Shares of fertilizer and agriculture companies have been trending south since July 28.
• Susquehanna Financial’s Don Carson reduced the price targets for Agrium Inc. (USA) AGU, CF Industries Holdings, Inc. CF, Mosaic Co MOS, Potash Corporation of Saskatchewan (USA) and Intrepid Potash, Inc IPI.
• Investor sentiment for agriculture input suppliers is expected to improve with the increase in grain prices and margin expansion, Carson stated.

Analyst Don Carson mentioned that weak nitrogen and potash prices, along with lackluster ammonia volumes, are expected to have restricted the earnings of most companies in 4Q15. Several fertilizer and agriculture companies are scheduled to report their 4Q15 earnings in the next few days.

Carson expects investor sentiment to improve for agriculture input suppliers, with the likely rise in grain prices and growing margins in the 2016 planting season. He added, “As planting season approaches, we expect a seasonal rebound in crop nutrient prices from the current multi-year lows.”

Agrium

Susquehanna Financial maintained a Positive rating for the company, while reducing the price target from $117 to $105.

Agrium is expected to report 4Q15 earnings of $1.29, short of the consensus expectation of $1.41. The shortfall is likely to be due to lower spot potash and nitrogen prices as well as lower ammonia volumes, reflecting the impact of inclement weather conditions.

The EPS estimate for 2016 has been reduced from $7.75 to $6.50 to reflect the outlook for lower potash and nitrogen prices, lower crop nutrient prices and crop protection margins.

Continued cost cutting initiatives and capital discipline are expected to lead to additional portfolio moves, such as exit of Phosphate and Australian Retail units, Carson stated. Such initiatives, along with a decline in the company’s capex, are expected to boost free cash flow over the next five years.

“We expect management to focus on the prospect of improved N and K volumes along with the tailwinds from a rapidly depreciating C$ and falling natural gas costs to offset declining fertilizer prices and Retail margins,” the report stated.

CF Industries

Carson maintained a Positive rating for the company, while reducing the price target from $58 to $48.

Lower ammonia volumes resulting from a “weather-shortened fall application season” and lower ammonia, urea and UAN prices are expected to have had a negative impact on CF Industries’ 4Q and 2015 results. The company is now expected to report 4Q15 and F2015 EPS of $0.95 and $4.00, respectively.

Lower nitrogen prices are also likely to restrict the company’s future earnings. The EPS estimates for standalone CF Industries for 2016 and 2017 have been reduced from $4.40 to $3.95 and from $4.75 to $4.60, respectively.

Carson expects the $8.2 billion purchase of OCI’s non-African assets to boost CF Industries’ share of the US urea and UAN markets, besides lowering its tax burden. The $2.8 billion equity investment from CHS will provide CF Industries necessary cash to fund the OCI acquisition.

The company may resume cash distribution in mid-to-late 2016 once it completes the OCI acquisition, the report stated.

Intrepid Potash

The analyst maintained a Neutral rating for Intrepid Potash, while reducing the price target from $4.00 to $1.50.

Declining potash prices are expected to have restricted the company earnings in 2015 and the trend is likely to continue going ahead. The company is now expected to report 4Q15 and 2015 EPS of ($0.08) and ($0.11), respectively.

The EPS estimates for 2016 and 2017 have been reduced from ($0.20) to ($0.40) and from ($0.10) to ($0.30), respectively, on a lower potash price outlook.

Mosaic

Susquehanna Financial maintained a Positive rating for the company, while reducing the price target from $47 to $36.

Lower potash volumes and prices and lower realized DAP prices are expected to have had a negative impact on Mosaic’s 4Q and 2015 earning, Carson stated. The company is now expected to report 4Q15 and full year earnings of $0.49 and $2.90, respectively.

The EPS estimate for 2016 has been reduced from $3.10 to $2.45, to reflect lower potash prices and volumes and lower phosphate prices, offset by “slightly lower COGS from a weaker C$ and softer ammonia and sulphur prices.”

The analyst expects a modest y/y recovery in phosphate prices in 2017, albeit the volumes are likely to remain weak.

“We project MOS to generate FCF of $400 mln and $500 mln in 2016 and 2017, respectively, in spite of trough potash and phosphate pricing. The company’s sub- 1.5x net-debt-toEBITDA ratio gives it a strong position to sustain its dividend and continue repurchasing shares,” the report stated.

PotashCorp

Carson maintained a Neutral rating for the company, while reducing the price target from $22 to $17.

Lower potash and nitrogen prices are expected to have restricted the company’s 4Q15 and full year earnings. The company is now expected to report 4Q15 and full year earnings of $0.27 and $1.55, respectively.

“We are also lowering our 2016 potash volume forecast to 9.15 mln mt from 9.5 mln mt. Due to elevated inventories in China (2.5 mln mt) and India (1 mln mt),” the report mentioned.

Carson said that investors will be expecting the company’s CEO Jochen Tilk to provide details of its price-over volume stance, additional capacity shut-ins and the future dividend payments. Investors will also seek details of a further consolidation in the potash industry.

“We expect the company to address capacity reductions at its SK mines following its NB closure as well as the future of its unsustainable dividend,” the report added.