(By Kevin Donovan) Fertilizer stocks are on the march after leading producer Agrium (AGU) said it expects second-quarter earnings to be near or at the top of its previously reached guidance range of $4.18 to $4.70 per share.
"These impressive first half earnings are due to excellent results across our crop input business. The outlook remains very positive, supported by the strong global grain prices and a balanced-to-tight international nutrient supply demand situation. Agrium's strategic investment across the crop input value chain continues to benefit from the strength in these underlying fundamentals," Mike Wilson, Agrium president and CEO, said in a press release.
The catalysts have been higher grain prices and increases in planting. According to the U.S. Department of Agriculture, wheat prices have averaged $7.25 per bushel in the 2011/12 season. Corn is averaging $6.10 a bushel this season vs. $51.18 last year. Meanwhile, acreage has gone from 88.19 million in 2010/11 to 91.92 million this season. The USDA estimates another jump to 95.86 million in 2012/13.
In his statement, Wilson cited higher "nutrient prices," industry speak for the price of what it sells – stuff to help crops grow. Indeed, according to the USDA's tabulation of fertilizer prices paid by farmers, potassium chloride has gone from $601 per ton to $647 a ton this year.
Dovetailing with the demand side is the continued depressed price of a key feedstock ingredient in making fertilizer – natural gas. Wilson said Agrium expects the average North American realized gas price for the second quarter of 2012 will not deviate significantly from approximately $2.25 per MMBtu.
Share prices have responded to Agrium's announcement, with Agrium itself up 4.85% in Tuesday's trading session. Smaller-cap Intrepid Potash (IPA) was up 3.30% to $20.68 and rival Potash Corp. (POT) was up 2.82% to $38.64.
Can investors still play the strength in the agricultural chemicals sector? Well, Agrium still trades at a PE of 8.71 vs. Potash Corp.'s 11.93 and Intrepid's 15.32, so there's still a gap in valuation. That's probably because Agrium lags Potash Corp. in profitability. Agrium has return on assets of 10.28% vs. 17.42% for Potash, and a return on equity of 24.93% vs. 36.55% for its competitor.
Given Agrium's upbeat outlook and expectations that agriculture cold be hitting a sweet spot of higher prices and greater production, earnings surprises from the agricultural chemicals companies could be in the cards.
Agrium Inc. is a major retail supplier of agricultural products and services in North America, South America and Australia and a leading global wholesale producer and marketer of all three major agricultural nutrients.