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Fertilizer stocks remain a cult on Wall Street as a way to get exposure to the theoretically unlimited upside potential of the agricultural business. After all, everyone needs to eat, and we trade what we know, right?
Afirca’s emerging middle class presents a massive new marketplace for biotech companies such as Monsanto (MON, quote) and Syngenta (SYT, quote). The profit potential for these stocks has been detailed on previous articles on www.emergingmoney.com
Today we’re looking at euro contagion in India, a phosphate strike in Iraq, China’s rising fiscal heft and other stories.
Agricultural names have had a tough time in the recent market retreat. But if industry giant Monsanto’s latest guidance is on track, things might not get better for the next year or so.
According to Monsanto (MON), the farm chemical business — which encompasses everything from fertilizer to pesticides — is unlikely to grow appreciably between now and the end of 2011.
This is harsh medicine for those who hoped that specialized pesticide makers like Israel Chemicals (ISCHY), which have outperformed the group, would be the first to recover from the global slump in demand for crop additives.
Fertilizer stocks have been savaged: MOS is down 37% from its mid-March peak, AGU is down 32% and POT, the leader of the pack, is down 31%.
Even Monsanto, usually considered more of a biologically modified seed vendor, is down 34%. While the losses have been huge, these stocks are still not priced at bargain levels: MON, for example, is still trading at 18x expected 2010 earnings.
The seed story
The good news is that Monsanto still expects double-digit growth from its seed operation, which accounts for about 2/3 of its overall business.
This could translate into upside for other seed companies like SYT, as well as (ultimately) for agricultural producers like Brazil’s Bunge (BG), which operates in multiple segments of the food industry.
Significantly, Monsanto notes that Brazil now accounts for 14% of its global revenue, up from a 7% share four years ago. If we are watching Brazil and we like the food story, BG may be a good stock to pick up for the long term:
Look at the way the fertilizer space has traded even with weakness in soft commodities(corn, wheat, sugar, soy).
One billion people around the globe are hungry. From moral obligation to national security, countries who can must step on global farming. Africa must be self sufficient on food, according to President Barack Obama. It needs irrigation, seeding and feritilizer.
Obama is going to Ghana next week to talk up this issue and to secure U.S. oil.
What international companies are best positioned to take advantage of that trade from a strategic perspective and not valuation?
Here are some names to make up your basket. They are a combination of U.S. and international companies who are active globally in this arena:Israel Chemicals Ltd. (ICL), Monsanto Company (MON), AGRANA Beteiligungs (AGR), Seaboard Corporation (SEB), Companhia de Saneamento Basico do Estado de Sao Paulo (SBS), Frankland River Olive Company (FLR), and Cosan Limited (CZZ).
