Yahoo Finance 3 Fertilizer Stocks to Watch Amid Industry Headwinds
The Zacks Fertilizers industry is being challenged by a pullback in fertilizer prices since the second half of 2022 on weaker demand as growers have reduced application rates due to affordability issues. An uptick in costs of key raw materials partly due to the war in Ukraine has also put pressure on the margins of 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, Yara International ASA YARIY and ICL Group Ltd ICL are worth a look despite near-term challenges.
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?
Lower Fertilizer Prices to Dent Profitability: 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 the 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.
Elevated Input Costs a Concern: A spike 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 Bleak Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #240, which places it in the bottom 4% 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 Underperforms Sector & S&P 500
The Zacks Fertilizers industry has underperformed both the Zacks S&P 500 composite and the broader Zacks Basic Materials sector over the past year.
The industry has lost 29.3% over this period compared with the S&P 500’s decline of 1.4% and the broader sector’s fall of 5.1%.
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 5.21X compared with the S&P 500’s 12.64X and the sector’s 7.92X.
In the past five years, the industry has traded as high as 23.66X and as low as 5.13X, with a median of 13.82X, 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.
Sociedad Quimica, carrying a Zacks Rank #3 (Hold), has an expected earnings growth rate of 2% 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 34.8%, on average. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SQM
Yara International: Norway-based Yara International is a leading global producer and supplier of mineral fertilizers. It has industry-leading experience in ammonia development, production, operations and distribution. The company is benefiting from higher selling prices which is offsetting a spike in feedstock costs, contributing to improved margins. A favorable nitrogen demand environment coupled with improved farmer affordability bode well for YARIY. The company also remains focused on rewarding shareholders by leveraging strong cash flows.
Yara International carries a Zacks Rank #3. It has outpaced the Zacks Consensus Estimate in three of the trailing four quarters. In this time frame, YARIY has delivered an earnings surprise of 145.1%, on average.
Price and Consensus: YARIY
ICL Group: Israel-based ICL is engaged in the fertilizer and specialty chemical sectors. The company is benefiting from the strength in its specialties businesses. Efforts to boost operating efficiency and productivity and launch new innovative solutions should also support its results. Higher end-market demand and selling prices are also expected to drive its performance.
ICL Group carries a Zacks Rank #3. ICL’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 16.8%, on average.
Price and Consensus: ICL
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Sociedad Quimica y Minera S.A. (SQM) : Free Stock Analysis Report
Yara International ASA (YARIY) : Free Stock Analysis Report
ICL Group Ltd. (ICL) : Free Stock Analysis Report
