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How Tax Bill Could Impact Agribusiness Stocks

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Part 2
How Tax Bill Could Impact Agribusiness Stocks PART 2 OF 3

Why CF Industries Could Be Big Beneficiary of US Tax Overhaul

Tax rate cut benefits

The Republican tax overhaul, which we discussed in the earlier part of this series, is expected to benefit companies as well as some individuals. Following Senate approval, many Wall Street analysts seemed to agree that corporate tax cuts would result in higher earnings for companies that are heavily exposed to the US market and have most of their operations within the country.

Why CF Industries Could Be Big Beneficiary of US Tax Overhaul

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However, on the other hand, there are fears that the tax cut will broaden the country’s debt even further. According to Reuters, this would add about $1.4 trillion in debt over the next ten years, taking the debt levels over $20 trillion.

Companies that will benefit

Fertilizer companies based in the US or that have most of their sales in the US stand to benefit from lower taxes. The above chart shows that CF Industries (CF), Monsanto (MON), and the Scotts Miracle-Gro Company (SMG) had effective tax rates above 25% in the past five years.

In 2016, SMG had an effective tax rate of 36%, Monsanto’s tax rate was 35%, and CF Industries’ effective tax rate was 30%.

In its November 15 analyst conference, CF Industries gave updates on the impact of the proposed tax reform on the company. The company, while expressing skepticism about the reforms to come into effect, stated that if the tax rates were to go down to 20% to 25%, then it would be a significant benefit given its large exposure to the US market.

Similarly, SMG projected a tax rate of 34% to 35% for 2018 on expectations that tax reform doesn’t pass. However, with the Senate’s approval on December 1, SMG may also benefit from tax rate cuts.

Next, we will look at tax rates for agribusiness companies operating outside the US (MOO) such as PotashCorp (POT) and Agrium.

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