Fertilizer companies got a boost during the Ukraine-Russia conflict because those two countries accounted for a significant share of worldwide fertilizer supply.
However, the tide has turned since then and fertilizer prices have fallen significantly. And now we have recession fears that is driving further slowdown in commodities. While these stocks have already given up much of their gains, there is more downside to them particularly with inflation abating, oil prices declining and agriculture pulling back as well.
We’re also that point of the business cycle where farmers start to get affected not just by demand destruction but also the availability of credit. Asset bubbles are deflating and so is farmland prices. It’s all part of a vicious connected cycle.
Urea prices have deflated -22% in April alone and as you can see from the price chart below, there is definitely further downside. Not to mention, the recent Inflation Reduction Act is set to give subsidies for hydrogen but not for nitrogen based products.
The three companies that are prominent in this business aer Mosaic (MOS), CF industries (CF) and Nutrien (NTR).
While all three are affected by the same macro headwinds, Mosaic and CF seem to have more downside both from a fundamental perspective and technical perspective.
First, the comps. You can see from the chart below that on a standalone basis, these companies are actually fundamentally quite steady. They have quite solid margins, free cash flow and relatively low debt. They are also undervalued with a P/E and EV/EBITDA in the single digits. However, what I've highlighted in red shows that both these valuation metrics are increasing, suggesting a slowdown in earnings.
Estimates
So the real issue is growth is expected to slow for both these names and that will drag down the stock price.
As you can see from the charts above, revenues, EBITDA and net income are all expected to slow for both CF Industries and Mosaic. CF however, is expected to slow more than Mosaic.
For CF, I see another $10 possible downside from here. There are three price targets to watch. $59.50, $55 and $44.75 (in an extreme circumstance).
For MOS, there is perhaps less downside. If it can break below, $34.50, there is some downside to about $30. (This is a weekly chart)
This is not the environment for these companies and therefore, they make good candidates for possible swing shorts. CF seems to be a better short than Mosaic given the estimates and technicals.
None of the above is investment advice. I have no position in this company but, I may initiate a short position 3 trading days after the publication of this article.