The Zacks Fertilizers industry is hamstrung by the pullback in fertilizer prices since the second half of 2022 on weaker demand as growers have reduced application rates due to affordability issues. A spike in costs of key raw materials partly due to the war in Ukraine has also put pressure on margins on the companies in this space.
However, favorable agricultural fundamentals and healthy farm economics augur well for the industry. Players in the industry like Sociedad Quimica y Minera de Chile S.A. SQM, CF Industries Holdings, Inc. CF and Intrepid Potash, Inc. IPI are worth a look despite near-term headwinds.
About the Industry
The Zacks Fertilizers industry comprises producers, distributors and marketers of crop nutrients for the global agriculture industry. Companies in this space offer nutrients such as phosphates (including diammonium phosphate, monoammonium phosphate and phosphoric acid), potash and nitrogen (including urea, ammonia and urea ammonium nitrate) fertilizers. They also provide other nitrogen products to help farmers maximize crop yield. Crop nutrients are essential to drive agricultural productivity and boost the natural fertility of the soil. Demand for these nutrients is being supported by the need to increase the production of grains to address rising food consumption globally. Moreover, the constant need of growers to nourish their crops, replenish nutrients in the soil following a harvest and boost yields to feed a growing global population drives the consumption of fertilizers.
What's Shaping the Future of the Fertilizers Industry?
Easing Fertilizer Prices: Fertilizer prices surged to historic high levels in the first-half of 2022, riding on the impacts of the Russia-Ukraine war that led grain prices shooting to record levels and export curtailments in China to meet domestic demand. Disruptions due to the sanctions in Belarus also contributed to the spike. However, prices of phosphate and potash retreated in the back half of the year from their peak levels due to weakening of demand. Escalating costs led to growers reducing fertilizer applications or switch to less fertilizer-intensive crops, leading to the demand destruction. Lower fertilizer prices are likely to dent the profitability of companies in this space over the near term.
Higher Input Costs a Worry: An uptick in key raw material prices poses a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — remain elevated. Plant shutdowns and maintenance have led to a tight supply of these raw materials, which coupled with strong demand, has pushed up their prices. Nitrogen fertilizer makers are also bearing the brunt of higher natural gas costs. The Russia-Ukraine conflict has led to a spike in gas prices in Europe. Natural gas costs are expected to remain higher in Europe over the near term due to the uncertainties surrounding supply from Russia. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.
Favorable Agricultural Fundamentals: While the coronavirus pandemic stung a vast spectrum of industries, agriculture was relatively unscathed, given the sustained rise in food demand globally. Moreover, strong global demand coupled with supply constraints boosted crop commodity prices. Higher freight, energy and labor costs and raw material shortages contributed to the upside. Prices of corn, soybean and wheat rallied to multi-year highs in 2022, partly driven by supply worries stemming from Russia’s invasion of Ukraine and are likely to remain elevated due to lingering concerns over the war. Higher agricultural commodity prices augur well for crop nutrient demand over the near term. Farmer economics also remain attractive in most global growing regions, aided by a spike in crop commodity prices.
Zacks Industry Rank Reflects Downbeat Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #242, which places it in the bottom 3% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector & S&P 500
The Zacks Fertilizers industry has outperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has gained 14.5% over this period compared with the S&P 500’s decline of 10.5% and the broader sector’s rise of 6%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing fertilizer stocks, the industry is currently trading at 6.4X compared with the S&P 500’s 12.33X and the sector’s 8.36X.
In the past five years, the industry has traded as high as 23.64X and as low as 5.6X, with a median of 14.23X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
3 Fertilizer Stocks to Keep a Close Eye on
Sociedad Quimica: Chile-based Sociedad Quimica produces plant nutrients, iodine, lithium and industrial chemicals. It is benefiting from being the low-cost producer of potassium chloride, potassium sulfate and potassium nitrate. SQM is gaining from favorable trends in the lithium market underpinned by strong electric vehicle sales. The expansion of lithium operations is also supporting the company’s lithium sales volumes. Strong demand and limited supply are also boosting lithium prices. Iodine volumes are also being supported by growing demand following the post-pandemic recovery. These factors have contributed to its share price rally of roughly 83% in a year’s time.
Sociedad Quimica, carrying a Zacks Rank #3 (Hold), has an expected earnings growth rate of 12.8% for the current year. It has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, SQM has delivered an earnings surprise of 37.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SQM
CF Industries: Illinois-based CF Industries is a leading global manufacturer of nitrogen and hydrogen products for fertilizer, clean energy, emissions reduction and other industrial applications. It is gaining from higher nitrogen fertilizer demand in the major markets. It is seeing higher nitrogen demand in North America for industrial uses. Higher nitrogen prices aided by strong global demand and lower global supply availability are also driving the company’s top line. CF remains committed to boosting shareholders’ value by leveraging strong cash flows.
CF Industries, carrying a Zacks Rank #3, has seen its shares rise roughly 16% over a year, driven by strong demand and pricing fundamentals for nitrogen. CF also has an expected long-term earnings per share growth rate of 6%.
Price and Consensus: CF
Intrepid Potash: Colorado-based Intrepid Potash is the only producer of muriate of potash in the United States and also makes a specialty fertilizer, Trio. It is gaining from a strong commodity environment. A recovery in economic activities and the strength in commodity prices are driving demand for its specialty fertilizer, Trio. Higher realized sales prices for potash and Trio are driving IPI’s top line.
Intrepid Potash currently carries a Zacks Rank #3. The Zacks Consensus Estimate for the current year for IPI has been stable over the last 60 days.
Price and Consensus: IPI
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