We Believe That Potash Corporation Of Saskatchewan Is Cheap

| About: Potash Corporation (POT)

Potash Corporation of Saskatchewan (NYSE:POT) also known as PotashCorp is a Canadian fertilizer company with the largest integrated fertilizer production operation in the world. PotashCorp operates three major business segments Potash, Phosphate, and PCS Nitrogen.

PotashCorp has the world's largest potash operation based on capacity. In fact, PotashCorp's potash operation accounts for about 20% of world capacity and 17% of world production. The international potash business has relatively few players which are located in Belarus, Canada, Germany, Israel, and Russia. Canada is the largest single player with about 30% of total world capacity coming mostly from the Saskatchewan region. Potash is an important fertilizer which supplies the critical element Potassium to growing crops. About 90% of potash production is used for fertilizer with the rest going into the production of drilling mud, de-icers, water softeners, food products, and soap. The Potash segment's revenues account for about 42% of PotashCorp's total revenues. Within this segment, there is approximately a 40/60 revenue split between North American (40%) and Overseas (60%) sales. PotashCorp operates 7 potash mines in Canada with 1 in New Brunswick and 6 in Saskatchewan. These mines have an annual production capacity of 15 million tons/year.

The Phosphate segment makes up about 28% of PotashCorp's total revenues. This segment manufactures phosphoric acid, animal feed supplements, and solid/liquid phosphate fertilizers. The bulk of this phosphate is used for fertilizer to provide plants with the critical element Phosphorus. PotashCorp is one of the largest phosphate producers in North America manufacturing 2.4 million tons of phosphoric acid and 9.6 million tons of phosphate rock. Also, PotashCorp is the largest producer of industrial purified phosphoric acid and phosphate animal feed ingredients in the world. Worldwide, there are a large number of phosphate producers. However, there are only three producers of industrial phosphoric acid in North America with PotashCorp's phosphoric acid business being the largest.

PotashCorp's PCS Nitrogen segment is the third largest Nitrogen producer in the world. The PCS Nitrogen segment accounts for about 30% of PotashCorp's total sales. This segment manufactures ammonia at 1 plant located in Trinidad and 2 plants located in the United States. Most of the ammonia produced is used as fertilizer with the remainder being used by industrial customers as a raw material for the production of other chemical products. The Nitrogen business is a regional business with relatively low barriers to entry. However, PotashCorp is well positioned as a low cost producer with its Trinidad operation.

We believe that there will be growing demand for fertilizer as the world's population grows and the standard of living in the developing world rises. Growing worldwide demand for meat products necessitates the use of large amounts of fertilizer to grow animal feed. We believe that this growing global demand for fertilizers will drive up prices for potash, phosphate, and Nitrogen. Another positive we see for PotashCorp's business is its significant free cash flow which we believe will be used to expand operations without using external financing. Other options for the use of PotashCorp's cash flow are share repurchases and increased dividend payments. PotashCorp has a history of using its cash flow to generate shareholder value and we have confidence that PotashCorp will continue to create value in the future.

We believe that PotashCorp is a good value at $38.32/share for the following reasons:

  1. PotashCorp has an inexpensive forward earnings multiple of 12.7 times 2013 earnings.
  2. PotashCorp has a 2.92% dividend yield and a history of dividend increases with a 33.3% dividend increase this year.
  3. The mean 12 month price target for PotashCorp is $46.14/share.
  4. HSBC Securities recently initiated coverage with an Overweight rating and a $48.00 12 month price target.
  5. S&P has a Buy rating on the stock (4 out of 5 Stars) and a 12 month price target of $52.00/share.

Disclaimer: We are not investment advisors. This article is not a recommendation to buy or sell securities. Always consult your investment advisor before making any investment decision.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in POT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.