Market Overview

For Fertilizer Makers, Drought Means Opportunity (MOS, POT, CF)

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In its fiscal fourth-quarter report Tuesday, Mosaic (NYSE: MOS) said it expects to see continued strong demand in fiscal 2013, boosted by increased demand from farmers at home and aboard. At the same time, the worst drought in 56 years is now threatening crops across much of the United States. Mosaic reported the growing evidence of nutrient deficiencies in the soil throughout the farm belt.

That double threat will be a bane for farmers, food producers, and eventually consumers - but it could very well turn out to be a boon for fertilizer makers like Mosaic.

Mosaic posted earnings per share and revenue for the quarter that were lower than in the same period of last year. However, both the top and bottom lines exceed the Thomson Reuters consensus estimates. The Minnesota-based producer of phosphate- and potash-based crop nutrients for the agriculture industry worldwide has a market capitalization of nearly $25 billion. It announced it would be doubling the dividend yield to more than 1.5 percent. The operating margin is higher than the industry average, and the return on equity is more than 18 percent. The stock has outperformed Market Vectors Agribusiness ETF (NYSE: MOO) but underperformed the S&P 500 over the past six months. Mosaic shares closed up 5.13% Tuesday to $58.21.

Canadian competitor Potash Corp. of Saskatchewan (NYSE: POT) is scheduled to post second-quarter results July 26, and analysts are looking for modest growth on the top and bottom lines. The market cap of this producer of fertilizers and feed products is more than $38 billion and the dividend yield is about 1.3 percent. Its long-term EPS growth forecast is higher at 11 percent, and the return on equity is a healthy 36.5 percent. Over the last month, shares are up more than 16%. However, over the past six months, the stock has underperformed competitors Mosaic and Monsanto (NYSE: MON). Potash shares closed Tuesday at $45.36, up 2.9% on the day.

The share price of Intrepid Potash (NYSE: IPI) is up more than 17 percent in the last month. The company posted declining earnings but higher revenue in its first-quarter report in May. This fertilizer maker is headquartered in Denver and sports a market cap of less than $2 billion. There is no dividend here, but the long-term EPS growth forecast is about 45 percent, and the operating margin is higher than the industry average. The price-to-earnings (P/E) ratio is higher than the industry average, but forecast to decline. Over the past six months, the stock has underperformed competitors Mosaic and Agrium (NYSE: AGU). Intrepid shares closed up 0.51% Tuesday to end the day at 23.75.

Illinois-based CF Industries (NYSE: CF) reached a new multiyear high of $205.11 on Tuesday. Analysts expect EPS to be more than 20 percent higher year-over-year when the company reports second-quarter results in August. This nitrogen and phosphate fertilizer producer is an S&P 500 component with a market cap of around $13 billion. It has a dividend yield of less than 1 percent. The P/E ratio is less than 9 and the return on equity is more than 36 percent. The share price is more than 40 percent higher year-to-date, as well as up more than 21 percent in the past month. On Tuesday, the stock rose about 2.51 percent, or $4.99, during the trading session.

The Market Vectors Agribusiness ETF includes Mosaic, CF Industries, Monsanto and Toronto-traded shares of Potash and Agrium among its top holdings. In the last month, shares are up more than five percent. On Tuesday's trading session, shares moved up 1.18 percent to trade at $49.77.

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