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, potash, nitrogen fertilizers, including urea, ammonia and urea ammonium nitrate, as well as other nitrogen products, to help farmers improve crop yield.
Let’s take a look at the industry’s three major themes:
- Weak agricultural commodity prices are continuing to hinder the recovery of the fertilizer industry. Prices of major crops like corn and soybean are at multi-year lows, partly due to a supply glut. Meanwhile, escalating trade tensions between the United States and China are weighing on crop prices in North America.
- Prices of phosphate are declining owing to lower global demand and increased supplies. While phosphate prices are expected to remain under pressure in the near term, enforcement of environmental regulations may limit production and export volumes of phosphate from China, providing support to prices heading into 2020. Also, prices of potash remain under pressure due to weak global demand. However, healthy demand along with tightened global supply is providing a boost to global nitrogen prices. Tighter demand and supply balance is likely to further drive nitrogen prices.
- The near-term demand outlook for major fertilizers is positive, supported by expectations of healthy fall application in North America. Expectations of higher planted corn acres in the United States suggest a pickup in crop nutrient demand in North America. Also, strong usage in key consumer markets is driving demand for primary crop nutrients. Demand for nitrogen and potash is also healthy in Brazil and India. However, China is witnessing a downtrend in phosphate demand, which is offsetting growth in other key markets.
Zacks Industry Rank Reflects Gloomy Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #173, which places it at the bottom 32% 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 bleak 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.
Despite the industry’s weak near-term prospects, we will present a few stocks that you may want to consider for your portfolio. But, before that, it’s worth taking a look at the industry’s stock market performance and current valuation.
Industry Trails Sector & S&P 500
The Zacks Fertilizers industry has trailed the broader Zacks Basic Materials sector and the Zacks S&P 500 composite over the past year.
The industry has declined 18.1% against the S&P 500’s rise of 3.2% and the broader sector’s decline of 15.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of 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 9.57X, below the S&P 500’s 11.01X and above the sector’s 8.54X.
In the past five years, the industry has traded as high as 13.10X, as low as 9.34X, with a median of 10.43X, as the chart below shows.
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Enterprise Value/EBITDA (EV/EBITDA) Ratio
Concerns over the U.S.-China trade war as well as persistent softness in commodity prices mar prospects of the Zacks Fertilizer industry. While the trade tussle is affecting crop prices, lower crop commodity prices are hindering the recovery of the industry. Moreover, weak global demand and higher supply are weighing on phosphate prices. Also, soft demand is hurting prices of potash.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and another with a Zacks Rank #2 (Buy) that are well positioned to grow. There is also another stock with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Scotts Miracle-Gro Company (SMG - Free Report) : The Zacks Consensus Estimate for current-year earnings for this Marysville, OH-based company has remained stable over the last 30 days. The company, sporting a Zacks Rank #1, has an estimated earnings growth rate of 21.3% for the current fiscal.
Price and Consensus: SMG
CF Industries Holdings, Inc. (CF - Free Report) : Based in Deerfield, IL, the company currently holds a Zacks Rank #2. It has an expected earnings growth of 103.2% for the current year. It also has an estimated long-term earnings growth rate of 6%.
Price and Consensus: CF
The Mosaic Company (MOS - Free Report) : This Minnesota-based company carries a Zacks Rank #3. It has an estimated long-term earnings growth rate of 7%. The company has an average positive earnings surprise of 2.8% for the trailing four quarters.
Price and Consensus: MOS