Catch the sweet smell of fertilizer stocks

Mosaic's earnings miss shouldn't deter sector bulls.

By InvestorPlace Oct 5, 2012 12:09PM

Image, Soybean field copyright Corbis, SuperStockBy Jim Woods

iplogoThe sweet smell of success is somewhat of a paradox in the fertilizer business. In fact, the more olfactory offense wafting through the air, the greater the sales of fertilizer and potash by leading companies in the industry.

This week, we received third-quarter earnings from industry behemoth Mosaic (MOS) that stunk -- but not in a good way.

The agriculture giant said it saw a loss of $229 million, or 42 cents a share, during the quarter ended Aug. 31. That's more than double the loss it had in the same quarter a year ago. 

The adjusted loss was 44 cents a share, which missed Wall Street expectations for a loss of only 42 cents. Sales suffered during the quarter, too, down 6.1% from a year ago to $2.11 billion, also falling short of expectations.

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Perhaps the stinkiest aspect of the Mosaic earnings came with the company's disappointing guidance for fiscal 2013. The company now expects full-year earnings per share (EPS) of $4.18 to $4.32, which doesn't approach the current consensus estimate of $4.38.

As you might expect, traders punished Mosaic shares with a sharp sell-off on the news. The stock now has fallen about 6% since the earnings release. The chart here shows that the stock is in danger of falling below key technical support at the 200-day moving average.

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The Mosaic shortfall also has put pressure on other stocks in the space. Fellow fertilizer maker Potash Corp. of Saskatchewan (POT) shares sank in sympathy with MOS, and the stock now has broken below support at its 200-day moving average.

Given the selling in the space -- and the general distaste for the "fert" stocks, as they are often called -- you might think that it's time to turn away from this malodorous sector. You'd be wrong.

Despite facing headwinds such as weak demand for potash in China and India, the fertilizer, seed and agriculture space also has some compelling fundamentals in its favor.

The latest quarterly grain stocks report issued by the USDA showed that stocks for corn and wheat are much lower than analysts were expecting. Corn stocks from what are called the "old crop corn" (corn that was grown this summer) were down 17% over last year. There was an even bigger slide in soybeans, which showed old crop stocks have fallen 21% from a year ago. Wheat stocks also suffered declines, falling 9% since last year.

Lower crop stocks likely will translate into higher crop prices, and higher crop prices mean increased costs for all types of food products, including cattle and hogs. To replenish low crop stocks, farmers will have to do whatever it takes to grow more feed to keep up with growing global food demand. The only way to do this is to make sure you have enough fertilizer, potash and seed on hand to accomplish the task.

This sentiment was echoed by Mosaic CEO Jim Prokopanko in a statement accompanying the earnings release, "The incentive is strong for farmers to plant maximum-yielding crops, and that is going to take strong fertilizer application rates."

This is the fundamental condition in place that I think will be bullish for fertilizer stocks going forward. It's also bullish for stocks in the ag space, such as seed provider Monsanto (MON) -- which recently displayed its own issues -- and to a lesser extent, agricultural equipment companies such as Caterpillar (CAT) and Deere (DE).

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One way to ensure you get exposure to a variety of stocks in the ag space is via the Market Vectors Agribusiness ETF (MOO).

This fund holds all of the large ag firms, including the aforementioned MOS, POT, MON, CAT and DE. The fund surged in early September right after breaking above its 50- and 200-day moving average. And though the fund is down from its September high, shares remain above both short- and long-term trend lines.

The pullback in fertilizer and ag stocks is, in my view, a great opportunity to pick up a fundamentally strong sector at an attractive entry price.

If you want to stink up your portfolio with some strong gains, try donning the sweet smell of fertilizer stocks.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

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