Why Fertilizer Stocks Are the Market’s Biggest Habitual Losers
It’s hard to believe that any sector or industry could actually be in the red for the last twelve months, given the catapult-like action the market used to send stocks upward back in mid-March of last year. Yet, the fertilizer/agricultural chemical industry’s stocks are indeed in the hole for that time frame.
The question is, do these stocks deserve the beating they’re still taking while every other industry seems to be moving ahead?
A ray of hope?: If it was just Cargill – a privately held company – acing earnings and revenue results for the most recent quarter, it may be dismissible. It wasn’t just Cargill, however. Converted Organics (NASDAQ:COIN) put up a 65% increase in its first quarter revenue on the heels of Cargill’s 175% improvement in earnings.
Two encouraging numbers to be sure, but the fact that these two are outliers may be at the heart of the problem.
Par for the fertilizer course: Monsanto (NYSWE:MON), for instance, saw a 19% drop in earnings last quarter, falling a little short of the expected EPS of $1.73 with actual earnings of $1.70 per share. At the same time, Mosaic’s (NYSE:MOS) earnings of 50 cents per share last quarter – though an improvement over last year – still fell short of anticipated 61 cents.
And, it seems the tepid results from those two big names in the industry are fostering enough worry to torpedo the entire group… the S&P 1500 Fertilizer & Agricultural Index is down 12% year-to-date, and down 10% for the last twelve months.
Something doesn’t add up: Still, while last quarter’s numbers remain hit and miss, the group’s average forward-looking P/E ratio (or price of profit readings) of 14.38 suggests these names are actually undervalued relative to the market. What gives?
Most likely, the issue is plausibility.
The projected earnings are compelling, but they’re also suggesting that earnings for fertilizer stocks will double between fiscal 2009 and 2010. … a ‘too good to be true’ scenario.
Too much supply, not enough demand: In fact, the projections are actually made less plausible by the decision from Monsanto last quarter to drop the prices of their Roundup weed killer to compete with generics, and the shrinking demand for fertilizer by dealers and distributors [thanks to tepid crop prices]. Together, those two factoids make it clear that the agriculture industry is still a buyer’s market, and not a seller’s market…. right where fertilizer companies like Mosaic, Monsanto, and Potash (NYSE:POT) don’t want to be. It means fertilizer companies have little to no pricing power, which in turn leads to crimped margins.
Until that changes, these stocks are apt to continue lagging.
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