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TMFMmbop (34.33)

Buy Israel Chemicals (ISCHF.PK)

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June 18, 2009 – Comments (6) | RELATED TICKERS: POT

Oh, Thursday. The day you get another Global Gains team-vetted stock recommendation for use in our CAPS Champion of the World contest, or, if you're really bold, real life.

This one comes from the mind of our crack analyst Nate "The Snake Weisshaar" and is a smart way to play the world's growing demand for food. But before I reveal too much, I'll turn it over to The Snake....

Buy Israel Chemicals (ISCHF.PK)

Thesis: The problem with agreeing with a well-publicized long-term trend is that it becomes difficult to make money off investments that are aligned with that trend. Take agriculture for example. I think most of us can agree that land is limited and people need to eat and as incomes rise, diets become more land intensive (it takes more grain to feed cows to make beef than it does to feed a human on said grain). Under this umbrella, it makes sense that companies dealing with farmland or agricultural technology will have a decent run going forward.

However, finding one that isn’t already atop everyone’s list (and so not exactly a value purchase) is difficult. However, yesterday’s announcement that K+S was cutting prices to deal with slack demand for potash in Europe helped a little. So today I offer up Israel Chemicals Ltd. (ICL) as an under the radar way to play the looming fertilizer boom.

Company Description: Israel Chemicals produces potash and phosphates for fertilizer, bromine for industrial applications (fire retardants and water purificiation), and specialized phosphates for food preservation. Based in Israel (I know, shocking), the company has production facilities on every populated continent (if you consider the Middle East part of Africa).  

It is majorly owned by Israel Corporation, a holding company or conglomerate, while Potash Corporation of Sascatchewan (NYSE: POT) owns 11%. So depending on how you look at it, you are either joining the ranks of some intelligent investors with strong industry insight, or positioning yourself to be abused by self-interested majority holders. I lean toward the former, especially given the relatively high dividend payout ICL offers.

Valuation: You might get excited by the reported 6.5% dividend yield ICL currently boasts, but let me burst that bubble quickly. That was the result of a freakishly bumper year in 2008 and I don’t count on that being reproduced in my valuation. However, a still reasonable 3-3.5% yield is likely to be sustained. 

Fertilizer stocks have crashed to earth after touching the heavens during 2008, but like I said, this theme isn’t exactly secret so valuations remain a little steep. However, ICL is the cheapest of the major fertilizer producers, and they all got a little cheaper after the aforementioned announcement.

If you ignore last year’s blip numbers, ICL has still seen revenue grow an average of 16% over the past five years and profitability has been steadily improving with efficiency measures. While sales have fallen off dramatically this year, Asian markets, which make up about a fifth of the company’s sales, are still up from their levels in 2007 and management has reported strengthening in this enormous market (Indonesia and Malaysia in particular). Despite this year’s pullback, cash flow remained strong through the first quarter. 

While this stock is far from what I’d call cheap, with food stores at historic lows and Asian economies expected to see actual growth this year, I think ICL is in a solid position to benefit from the few tailwinds the fertilizer industry has. With competitors cutting back production significantly, if the strength in Asia (or South America) proves to be higher than expected, it will be a windfall for ICL.

Takeaway: Put a green thumb on this under-the-radar player in an overexposed industry and watch your points grow like a well-fertilized field of wheat.

6 Comments – Post Your Own

#1) On June 18, 2009 at 11:23 AM, millionby24 (< 20) wrote:

fraud

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#2) On June 18, 2009 at 11:32 AM, TMFMmbop (34.33) wrote:

To what do you refer specifically?

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#3) On June 18, 2009 at 12:05 PM, catoismymotor (29.58) wrote:

I like being able to investigate a company after an enthusiastic account is given. I can find very little on my own about this one. I trust that you have done the work to satisfy your criteria. I just have no way to satisfy my own. I do appreciate you bringing this company to our attention.

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#4) On June 18, 2009 at 12:20 PM, ajm101 (31.89) wrote:

Fraud??

http://www.bloomberg.com/apps/quote?ticker=ICL%3AIT

It's a $50B sheckel ($12.5B USD) company.  That was 30 seconds of investigation on my part, unless you know more about how various levels of ADRs trade on the Pink Sheets, I think it's a really bad idea to throw around those kind of accusations.

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#5) On June 18, 2009 at 12:24 PM, TMFMmbop (34.33) wrote:

This is the company's website: http://www.icl-group.com/Pages/default.aspx

You can find more information under the "Investor Information" tab.

Tim

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#6) On June 18, 2009 at 1:16 PM, russiangambit (29.27) wrote:

This one is a real company. I see plenty of info on it. There is a similar russian company - Uralkali, also a potash producer. But it only trades in London under ticker URKA. I don't see it in CAPS.

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