Tuesday, October 23, 2007

Analysts Still Doubting the Fertilizer Stocks - I'm Adding Potash (POT) Ahead of Earnings

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With 2 of the 3 fertilizer stocks I track set to report in next week, I am adding to my Potash (POT) here as the stock is sitting at its 20 day moving average. CF Industries (CF) reports next Monday. After a big run from upper $80s/$90 in late August/September to mid 110s (about a 30% move), the stock has been 'digesting' the gains this month, and has fallen back down to $107.

This is an expensive stock relative to its peers so I have not been overweight; instead focusing first on Mosaic (MOS) pre-earnings and then CF Industries (CF). Let's review the players:
  1. Potash - potash/phosphate
  2. Mosaic - potash/phosphate
  3. CF Industries - nitrogen/phosphate
However, Potash has a premium valuation for a reason; it has the most ability to expand mining production of potash - a large advantage. And with that said, after looking at how wrong the analysts have been on this sector, and how conservative they are on 2008 estimates, I think this is going to be like Apple (AAPL), where an expensive stock becomes a bit less so once we see new earnings and guidance.

How wrong have analysts been on 2008 estimates? Let's look at the gurus analysis!
  1. Mosaic 08 estimates 90 days ago $2.04. 30 days ago $2.94. Now? $3.61 - only wrong by 77% 90 days ago and wrong by 23% 30 days ago. Oops.
  2. CF Industries has yet to report but 08 estimates 90 days ago $3.27. 30 days ago $4.19. Now? $4.93. Only wrong by 51% (and we are still awaiting the new estimates post earnings) from 90 days ago, and wrong by 18% (so far) from 30 days ago. Oops.
  3. Potash 08 estimates 90 days ago $3.51. 30 days ago $4.02. Now? $4.30. This one the analysts got 'somewhat right' - "ONLY" off 23% from 90 days ago and 7% from 30 days ago. But again they have yet to report so I expect the 08 number to be pushed up yet again post earnings.
Folks, I am not a full time fertilizer analyst working for a major brokerage (in fact the closest I get to fertlizer is what the dog leaves on the lawn on a daily basis), and even I could see months ago the 'big picture' - by doing a little digging and seeing the contracts being signed and huge price increases - well you can see the obvious. Not sure what world the analysts live in aside from the 'err on caution' world. At least they started to see the light in late September.

Back to the valuations. I hesitate to even post the PE ratio on 08 estimates because as I've shown above, its faulty at best since the estimates are rising monthly. But as of "today" this is how it stands

POT on 07 - 33x, on 08 - 25x
MOS on 07 - 20x, on 08 - 17x
CF on 07 - 16.7x, on 08 - 16x

So Potash is not cheap, but I am going to assume it will become more cheap on a go forward basis in about 48 hours. In fact Mosaic gave us a preview of Potash's earnings. They're gonna be good - very good. It's just a matter of "are they good enough for the heightened expectations Potash has". Unlike Potash, Mosaic did not have high expectations going into earnings, and hence why it was a great short term boom. As for the striking valuation differences, well this is why CF Industries is the fund's #1 holding going into earnings. With that said, Mosaic is still my favorite at this valuation as potash has a lot more defensible moat (very difficult to bring on new supply) than nitrogen does. I will see how the nitrogen business is doing during earnings and then make a decision how far to cut back on CF Industries.

But for now I am adding to the smallest of the 3 positions, Potash, and adding 55 shares to the previous 95 I had. Potash now back up to 1.4% of the fund. Not huge, and if there is a post earning sell off on "sell the news", I'll be happy to buy more at lower prices. $99 or the 50 day moving average looks like a great support area.

Long all 3 names in fund; long all 3 names in personal account



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