Stifel Update Identifies Top Fertilizer Industry Investment

When farm equipment maker Deere reported first-quarter earnings two weeks ago, the stock price fell to a 52-week low, less than a month after the shares had posted an all-time high. The share price plunge was due in part to rising costs for farmers. Fuel, fertilizer and new equipment all cost more and the prices will be rising. The overall assessment is that farmers must buy fuel, fertilizers and other supplies before they will buy new equipment.
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Analysts at Stifel recently issued an update on the fertilizer market and how that will affect three top fertilizer makers: Mosaic Co. (NYSE: MOS | MOS Price Prediction), CF Industries Holdings Inc. (NYSE: CF) and Nutrien Ltd. (NYSE: NTR). The firm’s analysts expect “a more normalized price environment trending [for]ward, though all is contingent on some return to normalcy, particularly in energy.”

Crop prices are expected to remain elevated due to weather-related supply constraints, and high fertilizer prices have led manufacturers to dust off old project plans to increase capacity. Stifel’s analysts note:

These projects certainly carry execution and timing risk, but we believe the significant disruption caused by the conflict in Ukraine and China’s indecisiveness as a marginal exporter is driving a shift for net importing countries to revisit projects that, while not necessarily economically competitive in normalized price environments, provide important security of supply. We plan to monitor this more closely.

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Nutrien

Nutrien was formed in 2018 when a merger between two Canadian fertilizer makers (Agrium and Potash Corp. of Saskatchewan) created the world’s largest potash miner in a deal valued at around $36 billion, including debt. Stifel maintained its Buy rating on the stock while lowering its price target from $125 to $123. The stock traded at around $94 in the noon hour Friday.

In comments on their rating, the analysts noted:

We favor Nutrien for its high-quality and balanced exposure to fertilizer markets, given the firm’s significant assets in potash and nitrogen, as well as its defensive position in crop product retail. Nutrien is also unique in its strong pipeline of accretive “tuck-in” retail acquisitions, [its] potential for larger scale M&A transactions in Brazil [and its proven execution of] redeploying capital from recent significant divestments …

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Risks to the price target include commodity price risk, macro and geopolitical risk, management’s failure to execute on cost-savings plans, along with operational and regulatory risks to crop inputs.

Stifel maintained its Hold rating on Mosaic stock and lowered the $70 price target to $67. The stock traded near $59 in the noon hour Friday. Earlier this year, Mosaic acquired privately held Plant Response, a biological-based provider of crop inputs and technology. The acquisition was Mosaic’s first since 2016’s $2.5 billion purchase of Vale’s fertilizer business in Brazil.
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Stifel’s analysts commented:

Mosaic is a global leader in phosphate and potash nutrients, which benefit from comparatively lower demand elasticity versus other globally traded commodities due to their vital role in crop growth. Potash markets should remain relatively stable, but upside is limited, owing to Nutrien’s plan to keep markets balanced via excess capacity for the foreseeable future. This leaves Mosaic’s fate to be largely decided by phosphate markets, where we do not see an immediate catalyst for improvement.

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Risks include lower-than-expected fertilizer prices, declines in crop prices, a stronger U.S. dollar, operating risks, geopolitical risks and mine operating risks.

The Hold rating on CF Industries was maintained, but the $107 price target was cut to $93. The stock traded at around $95 in the noon hour Friday. The company is the world’s largest producer of nitrogen, and it benefits from relatively lower demand elasticity than many commodities because soil nitrogen must be replaced every year.
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Stifel noted that nitrogen markets have recovered thanks to Chinese-led rebalancing of the market and a slowdown in production capacity growth. However, Stifel commented, “we believe near-term upside may be limited by declining nutrient affordability and the recent reversion in fossil fuel feedstock spreads.”

Risks to the price target include lower coal and gas prices, lower-than-expected fertilizer prices, declines in crop prices, a stronger U.S. dollar and operating risks.