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Earnings Grow For Fertilizers And Specialty Chemicals - Edlain Rodriguez - Gleacher And Company, Inc.
Monday August 8, 2011, 10:57 am EDT

67 WALL STREET, New York - August 8, 2011 - The Wall Street Transcript has just published its Agricultural & Specialty Chemicals Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Emerging Market Demand - Specialty Chemicals and Fertilizer Pricing Power - U.S. Corn Crop

Companies include: K+S (SDF.DE); AG (LIN.DE); Agrium (AGU); Air Liquide (AI.PA); Akzo Nobel N.V. (AKZA.AS); and many more.

In the following brief excerpt from the Specialty Chemicals And Agriculture Report, expert analysts discuss the outlook for the sector and for investors.

Edlain Rodriguez, a fertilizers and chemicals Equity Research Analyst at Gleacher & Company, Inc., joined the firm in 2009 from Goldman Sachs, where he spent four years covering the fertilizer and commodity chemical space. Prior to joining Goldman, Mr. Rodriguez worked at Deutsche Bank AG on the chemicals research team for four years, Citigroup Asset Management and the Federal Reserve Bank of New York. Mr. Rodriguez earned an MBA from the Leonard N. Stern School of Business at New York University and a B.A. in economics from Stony Brook University.

TWST: How would you characterize the industry over the last six months or so? Let's start with the fertilizer space.

Mr. Rodriguez: Things have brightened considerably over the past year. Essentially, crop supply/demand fundamentals have tightened quite a bit, resulting in higher crop prices - and that's corn, soybean and wheat. As a result, with supportive crop prices, fertilizer producers have been able to raise fertilizer prices quite a bit over that time. Farmers have taken advantage of the higher crop prices, and they are buying as much potash, phosphate and nitrogen as possible in order to maximize their yield. So rising fertilizer prices have created a nice backdrop for these companies.

TWST: So profits are up and the stocks are responding well?

Mr. Rodriguez: Yes, definitely. While fertilizer stocks are not as hot so far this year, they have done quite well over the past 12 months. And it's because earnings have moved up considerably, and the key demand driver has been crop prices. As long as they remain supportive, fertilizer demand and prices will continue to trend higher. The stock prices, as well as earnings, have reflected that trend. Earningswise, for example, PotashCorp's (POT) earnings have jumped from $2.04 in 2010 to our estimate of $3.55 this year. CF Industries (CF) will see EPS move from $7.63 in 2010 to nearly $17 in 2011.

TWST: How about the specialty chemicals side? Would you give us a broad characterization of that over six to 12 months?

Mr. Rodriguez: Demand has been fairly good over the past year as the global economy gradually continues to recover. More importantly, many companies have been able to raise prices to partially offset rising costs. As you know, many of the specialty chemical names buy hydrocarbon commodity inputs, such as crude oil, natural gas or their respective derivatives. Sometimes, there is a lag in how quickly they can pass prices through, but earnings have been pretty solid over the past 12 months. So things are going well for them, but of course lately there is the fear that if you have a macroeconomic slowdown then volume will eventually be impacted. So while this would have a negative impact, you might see an offset in cost relief if commodity prices also decline with an economic downturn.

TWST: How about CF Industries? Please tell us a little bit more about what sets them apart in their group.

Mr. Rodriguez: CF doesn't have any potash exposure. It's mainly a nitrogen company with a little bit of phosphate. The stock has done extremely well over the past year - almost doubled - because it was a great way to play the strong corn fundamentals. CF had just acquired Terra Industries, U.S. natural gas - which is the bulk of nitrogen production - was becoming relatively advantaged and valuation was compelling as earnings escalated. Based on current earnings estimates, which may prove conservative, we believe the stock worth almost $170/share. The company is generating tons of cash, and we are hoping that they return some of that cash to shareholders through an aggressive share repurchase or special dividends. As almost a pure play nitrogen company, this was definitely one of the best ways to play the upside in corn prices, corn acreage and rising nitrogen prices. That's why we liked CF over the past year.

TWST: Switching over to specialty chemicals, aside from being able to pass on higher cost to customers, are there other major trends you follow at the moment?

Mr. Rodriguez: We have a preference for companies that, over time, have transformed their portfolio from more commodity toward more specialty businesses. Companies under coverage that fit that that bill and that we favor are names like Eastman Chemical (EMN), Solutia (SOA), Celanese (CE). Those are companies where, although they have done extremely well over the past year or so, I just don't think investors have sufficiently rewarded them for their portfolio transformation. As a result I think, over time, those companies will start to see multiple expansion. The stocks have done well, but mostly because of earnings growth, not because of multiple expansion. We think as investors begin to realize that the composition of earnings growth will shift toward the specialty businesses, then we will see multiple expansion.

TWST: Are those your three favorites within that space?

Mr. Rodriguez: Yes. Celanese is definitely a favorite; Eastman Chemical, Solutia and Rockwood (ROC) are favorite names of ours. We also like Nalco (NLC) because we think it's undervalued.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

Source: The Wall Street Transcript

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