UBS Investment Research
North American Agricultural Chemicals
Upgrading CF & Mosaic to Buy
Fertilizer sector share price decline of 22% creates attractive value
Valuations have improved despite reductions to our phosphate (P) and potash (K)
price outlook and our use of a lower P multiple. We use 2011 EBITDA in our
nutrient-based sum-of-the-parts valuation analysis as the market views 2010 as a
transition year to a normalized level of demand in 2011. With 2011 P EBITDA
now likely representing higher than normalized levels due to new capacity that will
erode post-2011 returns, we are lowering our 2011 P multiple to 5.0x from 6.0x.
Bottoming corn prices could provide support to fertilizer shares
Corn has declined only $0.25/bu since mid March despite significant bad news
including higher than expected plantings, a favorable yield outlook due to early
planting, and the strong $. Demand has improved with China’s emergence as a net
importer and a likely increase in the ethanol blend rate this summer. Improving
corn prices would be highly supportive of higher fertilizer share prices.
Reducing our phosphate and potash price projections
We are lowering our long-term Tampa DAP prices as new rock and DAP capacity
will detract from US producer economics post-2011. We are also reducing our
2011 potash estimates as domestic K price increases have been slow to materialize.
AGU, CF, & MOS are Buy-Rated, IPI and POT are Neutral-Rated
We are upgrading CF & MOS to Buy from Neutral on valuation. We maintain our
Buy on AGU as we expect their retail segment to be the biggest beneficiary of
improving 2010/11 ag fundamentals and higher corn acreage. We remain Neutral
on IPI and POT as we see only limited upside based on valuation.
Global Equity Research
24 May 2010
Sandy Klugman, CFA
Arun Viswanathan, CFA