Stock Analyst Update

Key Takeaways From Ag Earnings

Seth Goldstein, CFA

Unfavorable weather weighed on first-quarter results for many of the agriculture companies we cover, as a delayed start to the U.S. planting season reduced sales across every crop input category. While seed sales should bounce back in the second quarter, we expect less total nitrogen and crop chemicals will be used in 2018 as the late start reduces midseason applications. However, stronger potash demand outside of North America should more than offset stagnant or slightly reduced demand in North America.

So far this year, potash and phosphate prices have been supported by reduced supply. In potash, new supply delays via lower-than-expected potash production from both SQM and K+S have led to a tighter market. We expect this dynamic to continue throughout the year, and we’ve raised our 2018 potash price forecast to $270 per metric ton. Similarly, phosphate prices have also been supported by reduced supply as production has decreased in both the U.S. (from Mosaic) and China. Accordingly, we’ve raised our 2018 price forecast to $380 per metric ton. Our long-term price forecast for potash and phosphate are unchanged at $270 and $350 per metric ton, respectively, in real terms.

From a valuation standpoint, potash producers are trading at a larger discount to fair value than the rest of our ag coverage, largely due to our long-term outlook that potash prices will remain flat, in real terms, while we forecast real price declines in nitrogen and phosphate. Nutrien and Mosaic offer the most upside based on current prices, as they trade at price/fair value ratios of 0.89 and 0.86, respectively. We view K+S as overvalued, as the firm’s higher-cost potash and salt production will limit its earnings power. We also view CF as overvalued, given our forecast for lower nitrogen prices. Although we view Best Idea Compass Minerals as undervalued, we expect profitable growth to be driven primarily by the company’s salt segment rather than its fertilizer business.

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