3 Top Fertilizer Stocks to Buy From a Promising Industry
The Zacks Fertilizers industry is expected to benefit from strong demand fundamentals for major crop nutrients, including phosphate and potash. The underlying strength of the agricultural market and attractive farm economics are spurring demand for fertilizers globally.
Industry players such as CF Industries Holdings, Inc. CF, ICL Group Ltd ICL and Intrepid Potash, Inc. IPI are poised to gain from higher demand for fertilizers in the major markets. While weak fertilizer prices pose headwinds, factors like healthy farm income and expectations of increased planted acres are expected to drive crop nutrient demand globally in the near term.
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 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 boosts the consumption of fertilizers.
What's Shaping the Future of the Fertilizers Industry?
Strong Demand for Crop Nutrients: The companies in the fertilizers space are well-placed to benefit from strong global demand for major crop nutrients. In the United States, healthy farm profits and high levels of planted acreage are expected to drive demand for fertilizers. Strong farmer economics are also expected to support demand in major markets such as Brazil and India. The phosphate market is benefiting from higher global demand and low producer and channel inventories. Strong grower economics and healthy crop commodity prices are also expected to drive potash demand globally. Demand for nitrogen fertilizer also remains healthy in major markets. High levels of corn planted acres should drive demand for nitrogen in North America. Moreover, demand for urea imports remains favorable in Brazil and India.
Agricultural Fundamentals Remain Favorable: 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 last year, 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. Farmer economics also remain attractive in most global growing regions on strong crop demand. Expectations of high levels of planted corn and soybean acres globally also suggest a pickup in fertilizer demand.
Weaker Fertilizer Prices a Concern: Fertilizer prices surged to historic high levels in the first half of 2022, riding on the impacts of the war in Ukraine 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 as farmers reduced application rates due to affordability issues. Escalating costs led to growers reducing fertilizer applications or switching to less fertilizer-intensive crops. Global nitrogen prices have declined since the beginning of 2023. Higher global supply availability driven by higher global operating rates has resulted in a decline in prices. While fertilizer prices have stabilized somewhat of late, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.
Zacks Industry Rank Reflects Upbeat Prospects
The Zacks Fertilizers industry is part of the broader Zacks Basic Materials sector. It carries a Zacks Industry Rank #82, which places it in the top 33% 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 a bright near term. 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 30.6% over this period compared with the S&P 500’s rise of 13.8% and the broader sector’s increase of 8.5%.
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 6.76X compared with the S&P 500’s 12.8X and the sector’s 10.25X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.89X, with a median of 13.12X, 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
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 healthy demand environment aided by strong farmer economics. A recovery in economic activities is driving demand for its specialty fertilizer, Trio. Higher demand for key products is expected to drive IPI’s volumes. The company also remains focused on executing its capital projects, including HB pipeline, Moab potash cavern and the HB Eddy Shaft, which are expected to drive its production.
Intrepid Potash currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current year earnings for IPI has been revised 16.4% upward over the last 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: IPI
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. CF is seeing higher nitrogen demand in North America for industrial uses. Lower natural gas prices are also acting in the company’s favor. CF remains committed to boosting shareholders’ value by leveraging strong cash flows.
CF Industries currently carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the current year earnings for CF has been revised 1.7% upward over the last 60 days. CF also has an expected long-term earnings per share growth rate of 6%.
Price and Consensus: CF
ICL Group: Israel-based ICL is engaged in the fertilizer and specialty chemical sectors. The company remains focused on growing its specialties businesses. Efforts to boost operating efficiency and productivity and the launch of new innovative solutions should support its results.
ICL Group currently 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 10.5%, on average. The Zacks Consensus Estimate for the current year earnings for ICL has been revised 5.8% upward over the last 60 days.
Price and Consensus: ICL
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CF Industries Holdings, Inc. (CF) : Free Stock Analysis Report
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