Digging Into Ag Companies' Results
The quarter featured weather delays and reduced supply.
Unfavorable weather weighed on the most recent quarterly 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 next quarter, we expect lower quantities of nitrogen and crop chemicals will be used in 2018 as the late start reduces midseason applications. However, stronger potash demand outside 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 SQM (SQM) and K+S (SDF) 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. Phosphate prices have also been supported by reduced supply as production has decreased in both the United States (from Mosaic (MOS)) and China. Accordingly, we’ve raised our 2018 phosphate price forecast to $380 per metric ton. Our long-term price forecasts 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 (NTR) and Mosaic offer the most upside based on current prices, as they trade at price/fair value ratios of 0.89 and 0.88, respectively. We view K+S as overvalued, as the company’s higher-cost potash and salt production will limit its earnings power. We also view CF Industries (CF) as overvalued, given our forecast for lower nitrogen prices. Although we view Compass Minerals (CMP) as undervalued, we expect profitable growth to be driven primarily by the company’s salt segment rather than its fertilizer business.
Nutrien reported mixed first-quarter results, as strong potash and phosphate profits were offset by weak profits from the nitrogen and retail segments. Although the nitrogen and retail businesses should make up some of the lost sales in the second quarter, we slightly reduced our full-year outlook for both segments. However, the overall impact was largely offset by our increased near-term potash price forecast. After updating our 2018 outlook, we maintained our $58 fair value estimate. Although the stock has risen more than 10% since the company raised guidance in its earnings announcement, we still see more than 10% upside.
Mosaic reported somewhat disappointing first-quarter results, as its potash sales volume fell due to near-term weather-related rail issues. As such, the company was unable to fully take advantage of higher potash prices. Although we lowered our 2018 potash volume forecast for Mosaic to 8.40 million metric tons from 8.75 million, we think the company will benefit from higher near-term potash and phosphate prices. We left our $32 fair value estimate unchanged and think Mosaic offers some upside.
Compass Minerals reported mixed fertilizer results in its first quarter, as higher sulfate of potash volume was offset by lower prices. Because most of Compass’ North American plant nutrition volume is shipped to the Western U.S., the company wasn’t heavily affected by the colder spring in the Midwest. However, we continue to forecast sulfate of potash prices to fall in line with the marginal cost of production based on the production of sulfate of potash from standard potash. Regardless, we think Compass Minerals is undervalued and higher deicing salt prices and lower salt unit production costs will boost profits for the salt segment, which generates the majority of companywide profits. We think Compass offers attractive risk-adjusted upside to our $83 fair value estimate.
K+S reported solid first-quarter results as it ramps up its new lower-cost Bethune potash mine in Saskatchewan. Although the Bethune mine will lower K+S’ position on the cost curve, the company will continue to sit on the upper half of the cost curve on a consolidated basis. The higher position on the cost curve will limit the company’s profit growth as we forecast that potash prices will remain stable in real terms over the long term. Although we raised our fair value estimate to EUR 20 per share on the basis of higher near-term potash prices, we view K+S as overvalued.
CF Industries’ first-quarter results were derailed by the delayed start to the U.S. planting season. Although we expect some of the lost sales to be made up in the second quarter, we reduced our total volume forecast for 2018 to align with our outlook that farmers will use less total nitrogen in 2018. Although we maintained our fair value estimate of $30 per share, we see CF as overvalued, as we forecast that nitrogen prices will decline in real terms over the next several years. Our negative outlook is based on our view that new supply from the Middle East as well as Chinese nitrogen plant restarts will outpace demand growth.
SQM is scheduled to report first-quarter results May 23. On the basis of other companies’ commentary, we think SQM will report higher potash and specialty fertilizer prices, partially offset by lower potash volume as the company converts more of its brine to lithium production rather than potash production. The stock trades in line with our $55 fair value estimate.
Turning to ag companies we cover outside the fertilizer space, Archer-Daniels Midland (ADM) reported a mixed first quarter, as higher oilseeds profits were partially offset by reduced transportation results in the origination segment. Although the company is facing some near-term headwinds related to China’s proposed tariffs on U.S. crops, favorable grain merchandising conditions will outweigh the impact of the tariffs. We view ADM as fairly valued, trading just under our $46 fair value estimate.
Bunge (BG) began the year on a high note as higher soy crush margins led management to raise operating profit guidance. Similar to ADM, Bunge should realize higher near-term profits due to favorable grain merchandising conditions. However, Bunge should also benefit in the near term from China’s proposed tariffs as the company has a greater proportion of soybean processing operations in South America than ADM. Bunge is trading slightly below our fair value estimate of $75 per share.
Monsanto reported mixed fiscal second-quarter results as lower corn seed volume was offset by growth in all other segments. Bayer’s proposed acquisition of Monsanto continues to move toward closing by the end of June. Reports indicate that Bayer and Monsanto have received U.S. Justice Department approval for the deal after Bayer agreed to divest additional agriculture assets. Monsanto’s stock currently trades just shy of Bayer’s all-cash offer price of $128 per share. Our $128 fair value estimate reflects a 100% probability that the deal closes as planned.
DowDuPont’s (DWDP) first-quarter results were heavily affected by the delayed start to the U.S. planting season. We think most of the company’s seed volume will be made up in the second quarter. However, we’re less optimistic about demand for many of the company’s crop chemicals, as now we think U.S. farmers are likely to use lower amounts of crop chemicals this year. DowDuPont looks fairly valued relative to our $64 fair value estimate.
FMC (FMC) reported solid first-quarter results as its crop chemical segment increased sales by double digits on a pro forma basis in all geographical regions. Although the company had a strong first quarter in North America, second-quarter results are likely to be affected by the late planting season, as FMC sells its products through distributors and retailers. While the company has a bright medium-term outlook as it integrates the DuPont portfolio, we think it will have trouble replacing Rynaxypyr when it comes off patent in 2022, and we forecast a margin decline thereafter. Having raised our fair value estimate to $80 per share, we still view the company as modestly overvalued.
Seth Goldstein does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.