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3 Fertilizer Stocks to Keep an Eye on in a Challenging Industry
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The Zacks Fertilizers industry is hamstrung by softer fertilizer prices on demand weakness as growers have reduced application rates partly due to affordability issues. Elevated costs of key raw materials partly due to the Russia-Ukraine war have also put pressure on the margins of companies in this space.
However, favorable global agricultural fundamentals and healthy farm economics augur well for the industry. Fertilizer players such as CF Industries Holdings, Inc. (CF - Free Report) , Yara International ASA (YARIY - Free Report) and ICL Group Ltd (ICL - Free Report) are worth a look, notwithstanding the near-term headwinds.
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?
Softer Fertilizer Prices to Weigh on Margins: 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 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 declined 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 switching to less fertilizer-intensive crops, leading to softer demand. Global nitrogen prices have declined since the beginning of 2023. Higher global supply driven by increased global operating rates due to lower global energy costs has resulted in a decline in prices. While fertilizer prices have stabilized somewhat, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Concern: Increased prices of major raw materials pose a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — while have moderated somewhat lately, they 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. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.
Agricultural Fundamentals Remain Favorable: Fundamentals in the broader agriculture space remain positive, given the sustained rise in food demand globally. While prices of corn, soybean and wheat have declined from the multi-year highs reached in 2022, they remain elevated and supportive. 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.
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 #231, which places it in the bottom 8% 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 gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 21.8% over this period compared with the S&P 500’s rise of 24.9% and the broader sector’s increase of 0.9%.
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 10.02X compared with the S&P 500’s 18.97X and the sector’s 11.81X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.95X, with a median of 11.29X, 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
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 for industrial uses in North America. 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 2024 earnings for CF has been revised 19% higher over the past 60 days. It also has an expected long-term earnings per share growth rate of 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CF
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. A favorable nitrogen demand environment bodes well for YARIY. Lower energy costs are also contributing to improved margins. It has initiated a cost and capital expenditure reduction program to cut fixed costs through a targeted approach, prioritizing high-return key assets, and scaling down tail-return activities. Cost reductions and actions to strengthen the balance sheet are expected to boost the company’s profitability and cash flows. YARIY also remains focused on rewarding its shareholders by leveraging strong cash flows.
Yara International carries a Zacks Rank #3. It has an expected earnings growth rate of 50.9% for 2024. YARIY has a trailing four-quarter earnings surprise of 126.3%, on average.
Price and Consensus: YARIY
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. The acquisition of Nitro 1000 also allows ICL to expand its market position and leadership in Brazil's specialty plant nutrition. The buyout of Custom Ag Formulators also expanded its global Growing Solutions business.
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 14.2%, on average. The consensus estimate for 2024 earnings for ICL has increased around 9% over the past 60 days.
Price and Consensus: ICL
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3 Fertilizer Stocks to Keep an Eye on in a Challenging Industry
The Zacks Fertilizers industry is hamstrung by softer fertilizer prices on demand weakness as growers have reduced application rates partly due to affordability issues. Elevated costs of key raw materials partly due to the Russia-Ukraine war have also put pressure on the margins of companies in this space.
However, favorable global agricultural fundamentals and healthy farm economics augur well for the industry. Fertilizer players such as CF Industries Holdings, Inc. (CF - Free Report) , Yara International ASA (YARIY - Free Report) and ICL Group Ltd (ICL - Free Report) are worth a look, notwithstanding the near-term headwinds.
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?
Softer Fertilizer Prices to Weigh on Margins: 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 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 declined 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 switching to less fertilizer-intensive crops, leading to softer demand. Global nitrogen prices have declined since the beginning of 2023. Higher global supply driven by increased global operating rates due to lower global energy costs has resulted in a decline in prices. While fertilizer prices have stabilized somewhat, weaker year-over-year prices are likely to dent the profitability of companies in this space over the near term.
Elevated Input Costs a Concern: Increased prices of major raw materials pose a headwind to the companies in this space. Prices of both sulfur and ammonia — key inputs for the production of phosphate — while have moderated somewhat lately, they 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. As such, fertilizer makers are likely to face short-term margin pressure associated with higher input costs.
Agricultural Fundamentals Remain Favorable: Fundamentals in the broader agriculture space remain positive, given the sustained rise in food demand globally. While prices of corn, soybean and wheat have declined from the multi-year highs reached in 2022, they remain elevated and supportive. 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.
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 #231, which places it in the bottom 8% 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 gloomy near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 21.8% over this period compared with the S&P 500’s rise of 24.9% and the broader sector’s increase of 0.9%.
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 10.02X compared with the S&P 500’s 18.97X and the sector’s 11.81X.
In the past five years, the industry has traded as high as 21.85X and as low as 4.95X, with a median of 11.29X, 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
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 for industrial uses in North America. 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 2024 earnings for CF has been revised 19% higher over the past 60 days. It also has an expected long-term earnings per share growth rate of 6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: CF
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. A favorable nitrogen demand environment bodes well for YARIY. Lower energy costs are also contributing to improved margins. It has initiated a cost and capital expenditure reduction program to cut fixed costs through a targeted approach, prioritizing high-return key assets, and scaling down tail-return activities. Cost reductions and actions to strengthen the balance sheet are expected to boost the company’s profitability and cash flows. YARIY also remains focused on rewarding its shareholders by leveraging strong cash flows.
Yara International carries a Zacks Rank #3. It has an expected earnings growth rate of 50.9% for 2024. YARIY has a trailing four-quarter earnings surprise of 126.3%, on average.
Price and Consensus: YARIY
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. The acquisition of Nitro 1000 also allows ICL to expand its market position and leadership in Brazil's specialty plant nutrition. The buyout of Custom Ag Formulators also expanded its global Growing Solutions business.
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 14.2%, on average. The consensus estimate for 2024 earnings for ICL has increased around 9% over the past 60 days.
Price and Consensus: ICL