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Why Analysts Are Warming Up to Fertilizer Stocks

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What’s driving positive sentiment?

On May 15, CF Industries (CF) received price target upgrades from two major investment firms. Stifel Nicolaus raised its price target to $43 from $37, and Morgan Stanley raised its price target to $37 from $24. CF Industries and Mosaic (MOS) are the two largest fertilizer companies, producing nitrogen and phosphate fertilizers, respectively. Looking at their drivers for growth could offer insights into the recent upgrades.

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Growth drivers

As with all commodities, fertilizer companies (XLB), including Intrepid Potash (IPI), are sensitive to price levels in the commodities market. With little direction in prices for nitrogen, phosphates, and potash fertilizers, most of the related stocks moved lower or sideways for most of 2017.

However, since the industry is rationing capacity, prices appear to have gained their long-awaited momentum. For example, look at DAP (diammonium phosphate) prices in the above chart. They saw a significant rise in prices year-over-year in 2018.

Potash fertilizer prices have seen a much steeper rise in 2018 compared to 2017, as you can see in the above chart. A steeper rise indicates that potash prices rose faster in 2018. Urea prices appear to have swung widely but are also showing positive momentum, indicating a rise in prices.

Rising prices will support earnings growth for these fertilizer companies and may result in margin expansion in the near term, given that producers are operating at their lowest cost levels. We’ll keep an eye on the movements in this industry as we continue for the rest of the year.

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