Why I'm A Potash Buyer On The Dip

| About: Potash Corporation (POT)

For the past year, I thought Potash (NYSE:POT) was the traditional Greek side dish that my aunt always brought to Thanksgiving. It wasn't until earlier this year that I realized I was wrong. As I said in my previous article:

Admittedly, I didn't have a clue what the hell Potash was up until probably 6 months ago, when the stock passed through one of my radar screens, and I started to take a look. I'm not a chemistry guy and things involving big industry, chemistry, the commodity markets, and engineering don't usually play to my strengths. My experience in trading commodities is limited to occasionally laughing like an 11-year-old when the "Pork Bellies" ticker would occasionally scroll by on CNBC.

For those of you not intimately familiar with the fertilizer industry, (read: 99.99% of the world), Potash Corp. is a Canadian company that produces potash - one of the primary crop nutrients used to make fertilizer. Potash itself is any of several types of salts that contain potassium in water-soluble form. The company also makes nitrogen and phosphate, also used in fertilizer production. Excited yet? I am.

Thus, my research on Potash began. I looked through the company's fundamentals and penned an article calling to "Dig Into Potash". Then, I named the stock one of my 8 Attractive Trades for 2014, and I dug in personally and went long. My arguments for buying Potash were as follows:

  • Cheap long-term calls make for an inexpensive way to leverage a long investment in this potash staple.
  • As Uralkali uncertainty continues to wane, confidence in the ongoing stability and demand of the sector could push Potash Corp back to its pre-volatility levels of $40.
  • Negative catalysts of lowered guidance, as well as Uralkali volatility, will be left behind in 2013.
  • Potash continues to pay an attractive dividend.

The company reported earnings yesterday that failed to impress the street. The stock promptly traded off on the news. As reported by Bloomberg, here's the details of Potash's report:

Potash Corp. of Saskatchewan Inc., the world's largest fertilizer producer by market value, forecast 2014 earnings that trailed analysts' estimates after the price of its namesake crop nutrient fell 24%.

Profit will be $1.40 to $1.80 a share, the Saskatoon, Saskatchewan-based company said today in a statement. That compares with the $2 average of 28 analysts' estimates compiled by Bloomberg. Potash Corp. also cut its estimate for 2014 global shipments. The shares fell as much as 5.5%.

Potash Corp.'s "projections for its sales and for the global market would seem to indicate that demand response from farmers to lower potash prices has not yet been robust," Greg Barnes, a Toronto-based analyst at TD Newcrest Inc., said today in a note to clients.

Buyers of potash, a form of potassium used to increase crop yields, deferred purchases in the second half of 2013 after OAO Uralkali (URKA), the world's largest producer, quit a sales accord in July with its Belarusian competitor and announced plans to boost output. The rift has undermined prices and raised concern among investors that the market will remain oversupplied.

As the volatility in Belarus with Uralkali continues to calm down, it was surprising to me exactly how conservative Potash's outlook was on the coming year. I feel this way, especially, when the company continues to note that there's "record potash demand" possible with current conditions.

The stock finds itself trading right around $31 today, levels that it was at last during mid December 2013. It's been off 27% in the last twelve months.

With the stock price lower and a recently declared dividend of $0.35/share, the dividend yield of the company is now 4.5%.

I am confident that the support at the $30 level is going to hold and I maintain my price target of $40 for Potash before 2015. The earnings news is already priced into the stock and I do not see Potash losing $30/share. Potash is a safe, reliable company that will be around for many years to come. It's simply a matter of time before it finds some cyclical momentum upward.

I am holding, and possibly adding, to my shares - and collecting the healthy dividend along the way.

Disclosure: I am long POT. 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.