Billionaire Ray Dalio is Getting Bullish on Fertilizer Companies

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Feb 17, 2015
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Ray Dalio (Trades, Portfolio) is the founder of Bridgewater Associates – one of the world's largest hedge fund with $165 billion in assets under management. Last quarter, he initiated positions in two fertilizer companies – Potash Corp of Saskatchewan (POT) and Agrium (AGU). He also increased his holding in Mosaic (MOS) – another fertilizer company by over 52%.

Table 1: Bridgewater Associates' Fertilizer holdings

Company Shares Held as of 12/31/2014

Change from Last Quarter

Potash Corp of Saskatchewan 601,600 New Buy
The Mosaic Company 41,300 +52.96%
Agrium, Inc 103,466 New Buy

Source : Gurufocus

I believe investors should take a cue from

Ray Dalio (Trades, Portfolio) and consider buying these companies. Not only do these companies have good dividend yields and reasonable valuations, their managements are also talking about a recovery in business fundamentals. Here's a look at these companies in detail.

Potash Corp of Saskatchewan

Potash Corp of Saskatchewan is the world's largest integrated fertilizer company by capacity. The company own and operate five potash mines in Saskatchewan and one in New Brunswick. Potash Corp is trading at a forward P/E of 16.54 and has a forward dividend yield of 4.10%. The company's EPS forecast for the current fiscal year is $2.08 and next year is $2.24. Out of 31 analysts covering the company, eight are positive and have buy recommendations, 20 have hold ratings, and three have sell ratings.

On its recent earnings call, Jochen Tilk, the company's president talked about strong market fundamentals, which the company witnessed in fourth quarter. The company's sales volume topped expectations, and its price realizations also reflected a continuation of recovery that unfolded throughout 2014. For FY2015 management has given an EPS guidance of $1.90 to $2.20, and the company expects better costs and margins. The company's board and management team have recently raised dividend which shows their confidence in the business as well as intent to return capital to the company's shareholders. Given the company's potential to increase earnings, coupled with declining expansion spending, it is likely that we will hear more positive news regarding dividend increases/ share buybacks going forward.

The Mosaic Company

The Mosaic Company is the world's largest phosphate producer and the fourth-largest producer of Potash. It is trading at a forward P/E of 13.50 and has a dividend yield of 1.90%. Out of 24 analysts covering the company, 8 are positive and have buy recommendations, 14 have hold ratings and two have a sell ratings.

Last quarter, Mosaic reported an EPS of $0.97 per share, an increase of nearly threefold from a year ago. The company's revenues for the quarter were $2.4 billion, up 9% over the fourth quarter of 2013. According to the company's CEO, James T. Prokopanko, robust demand for its products, and good execution were the primary drivers of the company's earnings. The company expects global demand to remain strong in FY2015. Morgan Stanley analyst Vincent Andrews recently upgraded the rating on Mosaic from equal weight to overweight.

Agrium, Inc

Agrium is a major producer and retailer of fertilizer. The company's business spans the crop input value chain, as it produces and distributes nutrients, seed and crop protection products and services to farmers. Agrium is trading at 14.31 time FY2015 EPS estimates and has a dividend yield of 2.90%. The company's EPS forecast for FY2014 is $5.61 and FY2015 is $7.59. According to the consensus estimates, its top line is expected to grow 3.90% in FY2014 and 5.10% in FY2015. Out of 29 analysts covering the company, 14 are positive and have buy recommendations, 14 have hold ratings and one has a sell rating.

Agrium recently raised its target dividend pay out ratio to 40%-50% of free cash flow. It is higher than its previous 25%-35% target. The company also plans to buy back upto 5% of its common shares over the next 12 months. Announcing these changes, Chuck Magro, Agrium's President and CEO commented, "We expect our free cash flow generation to increase significantly as we complete our major production capacity expansion projects for nitrogen and potash this year. We believe that the higher payout ratio strikes a balance between returning significant capital to shareholders, while maintaining our core assets and flexibility for growth. The Bid (stock buy back) provides an additional avenue to return capital to shareholders, while we also intend to increase our dividend in step with the growth in free cash flow."

The following chart shows Year-to-Date increases in the prices of these three fertilizer companies.

Chart 1: Year to date stock price movement of Mosaic, Potash and Agrium03May20171149071493830147.jpg

Source: Google Finance

Although these companies have seen a good run up in their prices recently and are likely trading above Bridgewater Associates' average buying price, I still see a good value in them. I recommend buying these stocks given their good dividend yields, reasonable valuations and positive outlook for the fertilizer sector.

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