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By Cagdas Ozcan

Recently, Potash (POT) released its latest market data update for the month of March. The figures for potash demand are relatively encouraging. Since the start of the fiscal year 2013, potash production by the North American producers is on the rise. The monthly production increased by 37% compared with the previous year level.

Domestic Sales and Exports

Potash exports for the month are high. March exports increased from around 0.8 metric tonnes in February to approximately 1.3 million metric tonnes. This is up by 59%, and a staggering 183% growth over the same period of last year.

Although the exports were doing well, the domestic sales suffered a notable fall by 13%. The North American producers' domestic potash sales weakened from 0.78 million metric tonnes in February to only 0.69 million tonnes. But in spite of the decline, March 2013 potash sales were still 7% higher than the year-ago sales. For the whole quarter, sales were remarkably higher than the same quarter sales performance in 2012.

Based on the above data, Potash will probably report higher potash revenues for the 1st quarter compared with last year. The company is a major player in this industry and potash's contribution to the revenues is approximately 42%. Therefore, any significant movement in sales under this segment will have great impact on the company's total revenue.

Mono ammonium Phosphate and Di-ammonium Phosphate

Another major segment of Potash is the phosphate segment. Under this segment are the mono ammonium phosphate and di-ammonium phosphate. The phosphate segment contributes approximately 28% to the total revenue of Potash.

The phosphates market performance weakened last month. The U.S. producers' March production was almost at par compared with last year. There were about 1 million short tons produced. But the exports fell by 17% compared with the previous year. However, it is up 6% from the previous month, and it is also higher than the January exports. There is month-over-month growth for the entire first quarter. But compared with last year, the quarter performance is still lower.

The phosphate segment of Potash will more likely reflect the performance of the market. So a decline in phosphate revenue might be observed in the current quarter.

Share Performance

Potash shares enjoyed a roller coaster ride in this year. There were three major highs, and there were three major lows as well. The share price peaked at $43.67 per share on January 25, gaining 5.7% for the year. On that same day, Potash also announced its support for the First Nations Business Venture.

But in the middle of February, the shares took a deep plunge. This may be due in part to the news of declining phosphate production. After the release of the market data, shares rapidly retreated. The price closed at $40.38 on February 20. But three days after, it went down to the lowest point of the month at $38.60 per share. It lost 4.4% in a week.

However, the price bounced back in the ensuing days and peaked again at $41.62 on March 12. But the rebound was short-lived. Since then, POT shares retreated and hit the bottom of the year at $38.01 on April 19. Despite the encouraging latest market data released on April 15 showing improved performance versus last year, shares continued to retreat. Perhaps the next quarter earnings can save the retreating prices if the figures are encouraging. Otherwise, the share price will probably take another dive.

Financial Performance

At the current valuation, Potash is already undervalued. It has a market capitalization of $33.610 billion. This is higher than its smaller peer, Agrium (AGU), whose market capitalization stood at $13.7 billion. Moreover, the company has a P/E ratio of 16.32, while the forward P/E is 12.86. It is consistent in giving dividends to the shareholders. The current annualized dividend is $1.12.

Potash is also earning year over year, although the net revenue is declining. Nonetheless, it is able to generate positive earnings per share for the past three years. The company encountered a minor setback last year due to weakening global demand for potash and phosphate. Total revenue fell from $8.715 billion in 2011 to $7.927 billion in 2012. This resulted in a decline in EPS from $3.51 to $2.37 per share.

Market Outlook for 2013

While the market for potash in 2012 weakened, Potash projects that the market will significantly improve this year. Such projection is founded on various market facts. The latest market data has also proven that the projections were correct. In the first quarter, potash exports dramatically increased. The production was also up in anticipation of the increased demand. The first-quarter potash sales also saw improvement compared with last year.

This will translate to improved revenue for the first quarter. When Potash releases its first-quarter earnings, this will probably trigger the onset of a rebound from the declining shares.

(click to enlarge)

My Take

Similar to most analysts I have a positive view about Potash. Out of 29 analysts in Yahoo Finance, 13 advised a hold while 12 recommended a buy. Four analyst firms even voted for strong buy.

Nasdaq analysts, on the other hand, have more or less the same view. A majority of the analysts firms recommended a hold, or nine out of 22 firms. Eight of them went for strong buy, while three firms recommended a buy. On the contrary, two firms advised a sell. Nevertheless, the consensus of the analysts is hold. This is a sign that they are expecting a rebound any time soon.

So, if you are going to sell today, then you may lose your chance to make profits once Potash bounces. There is higher probability that it will rebound given the encouraging market data for potash. The increased demand for potash will gradually pull Potash up and support its next rally.

Source: What Is Going On With Potash Corp.?