By Sam Stovall
Spring is just around the corner. And just in time for warmer weather, the Fertilizers & Agricultural Chemicals subindustry index -- which consists of makers of agricultural fertilizers and pesticides, as well as lawn and garden products -- has joined the . Analyst Richard O'Reilly, CFA, who covers many of this industry's players for Standard & Poor's Equity Services, is slightly positive on the group's investment outlook.
As a quick primer, O'Reilly reminded me that fertilizers are substances or mixtures that contain one or more of the primary plant nutrients (phosphorus, nitrogen, and potassium), and sometimes secondary and/or trace nutrients. Pesticides control or destroy plant and animal pests.
SEASONAL AND VOLATILE.
IMC Global (IGL ; recent price, $11) is the world's largest maker of phosphate and potash fertilizers. In January, it agreed to merge with the fertilizer unit of privately held Cargill to form a new company, which will be 33.5% owned by current IMC shareholders, with $4.1 billion in annual sales. The merger, expected to be completed in the third quarter, came as a surprise to O'Reilly, based on his concerns about antitrust issues. The new outfit will have over 50% of U.S. phosphate capacity.
In herbicides, Monsanto (MON ; $33), followed by S&P analyst Stewart Glickman, is the leader. (It's the largest business in the subindex.) It makes the biggest-selling product in the category, herbicide Roundup.
O'Reilly notes that agricultural markets are both seasonal and volatile. Demand is a function of such factors as grain prices, government farm programs, acreage and mix of crops planted, weather patterns, farming practices, and the value of the U.S. dollar. Corn cultivation is the largest use for agricultural chemicals in the U.S. The U.S. farm economy and crop markets are generally mature. As a result, year-to-year changes in demand reflect the level of planted acreage and application rates.
RAIN DAMPENS SALES.
The analyst sees a modest increase in planted corn acreage in 2004 as well as greater fertilizer export volumes. O'Reilly believes changes in demand for pesticides will also reflect introductions of new products and formulations. But he thinks the developing nations of Asia and Latin America hold greater long-term growth potential, since their rising populations, income levels, and demand for better living standards should increase the need for grain production.
The consumer side of the business is seasonal, with most North American sales made from February to June, as products are used for growing and maintaining lawns and gardens. Periods of wet weather tend to slow sales, according to O'Reilly. Businesses in this segment maintain a high level of advertising spending to leverage brand names and attract customers to specific products. This category is dominated by Scotts Co. (SMG ); $63), followed by S&P analyst Stewart Scharf. Scotts believes it's the world's largest seller of branded consumer lawn-and-garden products.
Of the industry members mentioned above, the one with the highest S&P ranking is Scotts, which carries a 4-STARS (accumulate) designation. IMC Global is ranked 3 STARS (hold), while Monsanto carries a 2-STARS (avoid) recommendation.
Industry Momentum List Update
For regular readers of the Sector Watch column, here's this week's list of the 11 industries in the S&P Super 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500) as of March 12, 2004.
* S&P's stock appreciation ranking system for the coming 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief investment strategist for Standard & Poor's