Fertilizer Wars: Who Has the Upper Hand?

Fertilizer isn't something that the typical investor might think about when trying to pinpoint companies that yield attractive returns. However, the industry has been booming over the past few years, as we will discuss in greater depth throughout this article. Now, keep in mind that we are talking about fertilizer here, not some technology company, so it is possible that the industry will revert to the mean in terms of margins (as I discuss in detail in this article). But, for those interested in potentially buying shares of a company in this industry, it's imperative to look for the best of the best.

For the purpose of this analysis, I will limit my discussion to three major players in the industry that are organized as companies other than limited partnerships; CF Industries Holdings, (NYSE: CF  ) , Potash Corporation, (NYSE: POT  ) , and Mosaic (NYSE: MOS  ) . The reason behind this is that the metrics in a partnership vary significantly from their non-partnership peers.

Sky-high margins
In terms of revenue growth, all three companies have performed quite well over the past few years. For instance, the four-year revenue growth for CF Industries has amounted to 134% ending in 2012. Likewise, PotashCorp has performed quite well with a 99.3% revenue growth over the same time horizon. Bringing up the rear, we have Mosaic which, at 47.6% growth, is far below its peers but still attractive. 

Despite this attractive growth, all three companies have been experiencing revenue shortfalls over the past quarter or so. Take CF Industries, for example, which has seen its revenue decline by 1.2% in its most recent fiscal quarter when compared to the same quarter a year ago. Fortunately for shareholders and management alike, the company outperformed its two major peers in this respect, with PotashCorp's revenue declining by 10.5% and Mosaic's by 4.5%.

As in the case of net income over the past quarter, each company performed in a way completely removed from the other. While CF Industries saw its net income fall by 17.8%, Potash saw its own rise by 23.2% (although this was largely attributable to a gain from special income/charges in the most recent quarter compared to a substantial loss in the same quarter a year ago), and Mosaic experienced a modest decline of 4.2%.

After digging into each company's numbers a bit more, I found that the reason behind the revenue decline can primarily be chalked up to a lower sales price for their products as competition has increased, partially offset by an increase in the quantity sold. On the other hand, as the sales price declined, the cost of goods sold (COGS) as a percentage of revenue for each producer increased, which helps to explain the general decline in net income from one quarter to the next.

Financial flexibility wonders
When assessing a company's balance sheet, I find two particular metrics to be the most useful: current ratio, which is a measure of a company's current assets divided by its current liabilities and measures how many dollars of current assets you have for each dollar of current liabilities, and long-term debt/equity ratio, which is a measure of how much debt a company has for each dollar of assets after factoring out all of a company's liabilities. 

From a current ratio perspective, CF Industries has the highest at 4.71, which means that it has $4.71 in assets that can be converted into cash reasonably quickly for each dollar in liabilities that are due within the next year. Mosaic comes at a close second with a ratio of 3.90, while PotashCorp is dead last with a ratio of 1.47 (which is still attractive).

However, when we look at the long-term debt/equity ratio of each company, we find that their placing changes considerably. Although each company's ratio is attractive, Mosaic takes a clear first with 0.08, which means that it only has $0.08 of debt for every dollar of assets after factoring out all liabilities. This means that the chance of the company going bankrupt (assuming that no fraud exists) is remarkably slim to say the least. PotashCorp holds second place in this respect, with a ratio of 0.29, while CF Industries is last with a ratio of 0.62, suggesting that if times became very, very hard for a long while, it may have the hardest time managing its debt load.

Foolish takeaway
Having analyzed both the income statement and balance sheet of CF Industries, PotashCorp, and Mosaic, it's possible to draw some strong conclusions. First, each company is very attractive from a fundamental perspective, but there appears to be a big difference in terms of quality. Second, each one exhibits traits that are more favorable than those of another.

Seeing as how the first conclusion has been covered in detail as part of the analytical process, the second conclusion should be addressed now. As an example of this, we discovered that CF Industries has performed the best in terms of growth while declining the most in terms of profitability as its costs are on the rise. However, it has a very high amount of liquidity as shown by its high current ratio and moderate debt. Meanwhile, Mosaic appears to be very close to CF Industries in terms of liquidity but far surpasses its peers when looking at how levered each is (their debt load).

Each of these two companies should appeal to investors differently because of their strong but unique selling points. Even though its metrics are, more or less, the middle of the road, PotashCorp, a company with attractive growth and a fairly unlevered balance sheet, should draw in investors who want a little taste of what CF Industries and Mosaic have to offer.

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