It has been a stormy year for Israel Chemicals Ltd. (TASE: ICL). The start looked promising: despite the stock market collapse, shares in the fertilizers producer continued to rise. The fuel for the rises was supplied by commodity prices, which swept prices of fertilizers up along with them. This process has gone on for the past three years, during which the price of potash has shot up from $200 per tonne to $1,000. Potash is Israel Chemical's main source of revenue, contributing more than half the total.
Since the cost of producing the fertilizers remained almost unchanged, the rise in fertilizer prices reached Israel Chemicals net profit line almost in full. The company's share price shot up accordingly, and at the peak, its market cap passed the NIS 100 billion mark. The share topped the trading volume table almost daily, and there were those who dubbed it the new "people's share", in place of Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA).
Israel Chemicals pulled its parent company Israel Corp. (TASE: ILCO) up after it, and the two stocks were the only ones on the Tel Aviv 25 list that managed to preserve their rises.
Israel Chemicals' stock price also enjoyed a tailwind from analysts' recommendations. Analysts seemed to compete between them over who could set the highest target price. But, as in many other cases, it looks as though the analysts were too enthusiastic, too late.
After climbing 40% between January and July 2008, while the Tel Aviv 25 index fell 10%, Israel Chemicals ran out of gas. The bursting of the commodities bubble, and the fear of a global recession, toppled the stock, along with other fertilizer stocks around the world. Within a few weeks, Israel Chemicals shares lost 30% of their value. They are currently about 60% off their peak.
Even the announcement of the largest ever share buyback program by an Israeli company, to the tune of $1 billion, failed to convince investors, and the negative sentiment in the stock continues.
Ironically, just when the share price plummeted, the company reported record results that were no longer just the product of the boom. It broke the record for net profit for an Israeli company in the third quarter of 2008, in which it earned $846 million.
The sharp fall in Israel Chemicals' stock price was partly caused by the fact that it is one of the most liquid stocks on the Tel Aviv Stock Exchange. So, when investment institutions had to raise liquidity, they sold Israel Chemicals, putting pressure on the price.
It was not just the general panic and the liquidity crisis that caused the fall. Events in the company's markets also played a part. In its third quarter report, Israel Chemicals mentioned emerging weakness in the potash market for the near term. Potash orders fell dramatically in the fourth quarter, and stocks began to pile up at the producers.
While other potash producers around the world have announced cutbacks in output, Israel Chemicals is still sticking to routine, and does not intend to lower production. Thanks to the climatic conditions at the Dead Sea, the company can stockpile potash easily and at minimal cost indefinitely. This is what the company did during the last potash market low in 2006. When recovery got underway, it was ready, and took the market by storm.
Like the other potash producers, Israel Chemicals believes the downturn in the market is temporary, since seed stocks continue to be at an historical low, and demand for fertilizers is expected to return in 2009.
At the time of writing, Israel Chemicals shares are traded at a p/e ratio of just 6. On the face of it, the share price is very low, even taking into account that the next quarterly results will be weak.
On the other hand, like other fertilizer shares, Israel Chemicals shares are exposed to changes in commodity prices, and the correlation between them is fairly high. So if commodity prices continue to be volatile, Israel Chemicals' share price can be expected to be a roller coaster, and therefore the stock is recommended only for investors with strong nerves.
Published by Globes [online], Israel business news - www.globes.co.il - on January 28, 2009
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