Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Two Stocks to Benefit from Accelerating Fertilizer Demand

Thursday, May 3rd, 2012
By for Profit Confidential

Chinese economy The recent mild winter in the U.S. is providing farmers a unique opportunity to profit from high agricultural commodities prices due to adverse weather in other parts of the world. In addition to world demand for food continuing to increase, the mild winter has allowed farmers to plant crops at one of the earliest recorded times over the last several decades. Agricultural commodities can be fickle, based on weather and various inputs such as fertilizer. U.S. farmers are certainly going to try to profit by obtaining as high a yield as possible for their agricultural commodities. This will mean, in my opinion, increased use of fertilizer this year.

Chinese economy

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In its recent fourth-quarter report, The Mosaic Company (NYSE/MOS) announced that potash and fertilizer volume should increase at a faster rate than it expected, as demand is stronger than earlier guidance. Sales of agricultural commodities have increased to overseas markets, including China, other regional Asian countries, and South America. This demand is driving farmers to use larger levels of fertilizers and potash. While earlier estimates had fertilizer companies earning less, as farmers initially balked at the higher prices potash firms demand for their fertilizer, it now appears that demand is picking up after all.

Mosaic is also doubling its dividends, to a total of 12.5 cents a share from five cents a share. The company had $3.2 billion in cash at the end of February. It is generally a positive sign when companies increase dividends. If a potash producer like Mosaic feels so comfortable in doubling its dividend, then the future is most likely brighter than we anticipate for other fertilizer producers.

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Intrepid Potash, Inc. (NYSE/IPI) is another fertilizer producer that recently issued preliminary guidance for this year. While full quarterly release won’t come until the early part of May, Intrepid Potash estimates production of 215,000 to 225,000 tons of potash. The firm expects that the existing supplies of potash held by retailers will be diminished by the second quarter, and expects a pickup into the second half of the year. The average sale price per ton is expected to be $470.00-$480.00, with Intrepid Potash having a cost of $190.00-$200.00 per ton.

Intrepid Potash trades at a forward price-earnings ratio of just over 14, with a price/earnings to growth ratio of 0.27, which shows that the stock might be undervalued. The profit margin is 27.31% and the operating margin is 40.28%. The company appears to be well-managed. Intrepid Potash has over 176 million in cash and essentially no debt.

As we can see by the three-year weekly chart of Intrepid Potash, it is now bouncing off a higher low and is above the median downtrend line. While there is overhead resistance for Intrepid Potash, the current market appears to have some renewed bullish interest from investors. Mosaic is also showing a wedge formation over the last two years, with upward sloping moving average convergence/divergence and Relative Strength Index. While neither one is an outright buy at this stage, they are certainly stocks I would pay attention to over the next several weeks, as they could become bullish. Confirmation would need to come with a breakout up away from the top downtrend line in each case.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles