As the commodity sector gets hit one by one, starting with coal producers, then oil drillers, then precious metals miners, there is one sector that has gotten less press than the others – agriculture. Crop prices have tumbled in the past year as well, which has hurt farmers’ incomes and implies lower farm spending in 2015 vs. the past few years.
I discussed the potential downturn in farming-related spending in a NTT post on MON in mid-July, noting the weak outlook from GS research:
The GS Research team recently laid out the risks for a potential multi-year agricultural industry downturn, with the following thoughts:
With crop prices near cost of production in many areas and farm income down 25% in 2014-2015, by our estimates, we expect significantly tighter farm spending over the next year.
Since that post in late July, crop prices have dropped and then bounced, but remain near 5 year lows, as illustrated by the Bloomberg Grains index:
Given that the low prices have now persisted for almost 4 months, the agricultural sector is certainly going to feel the effects on spending in the next 6-12 months. Farmers are already planning cuts in spending on fertilizers, farm equipment, and seed technology. As a result, it’s not a major surprise to see a fertilizer stock like MOS, focused on phosphate and potash, now trading near 5 year lows:
However, the reason why MOS has my attention is that its situation reminds me of the issue facing many of the other commodity-driven sectors that I mentioned at the outset. The company has had an erratic revenue and earnings stream over the last 5 years, but one constant has been a steady drop in margins. With the stock’s P/E multiple at around 18x, with analysts expecting an average of 25% per year EPS growth over the next two years, the stock looks quite cheap. But investors obviously don’t have the same expectations as Wall Street analysts, and neither do I given the agriculture sector backdrop. In the other sectors, valuations have looked cheap much of the way lower, as analysts have been late to recognize the long-term impairment of earnings power.
However, given the relatively fair valuation, even if estimates are much too high, MOS looks to be in relatively better shape than many of its commodity counterparts. Nonetheless, the technical situation suggests watching the $40 level quite closely in the coming months.