Potash Corp. (POT) shares have recently declined to the low end of the recent trading range, and this is creating a potential buying opportunity. This company is a leading manufacturer of potash which is used in fertilizers. The stock was trading around $47 in early April, but it dropped about 10% after the company reported earnings.
Potash Corp. reported a profit of 56 cents per share for the first quarter of 2012. This was below the average analyst estimate of about 64 cents. The company also reduced guidance for full-year 2012 profits, which are now expected to be in a range between $3.20 to $3.60 per share. While this news is disappointing, it should only have a short-term impact on the stock, as the longer-term potential remains strong.
Here are 3 reasons why investors should consider buying Potash shares while the stock is down:
1. Fertilizers are a key component for global crop production and as the world population continues to grow, the demand for fertilizer will rise over the years. Short-term events such as weather conditions, recessions, and other factors have little impact on the long-term potential for fertilizer, so when a buying opportunity comes along, forward-looking investors can capitalize on it. Potash is well-positioned to benefit from the future demand growth and it is building a 500,000 tonne storage facility in Canada.
2. The first quarter results seem to have been impacted by two factors that could reverse and turn into positives in the coming months. It appears that some distributors in the United States and Canada held off on re-orders in recent weeks in hopes that prices would drop. This could mean that inventories at the distributor level might be at reduced levels, and this could bode well for future demand. Eventually, distributors will need to re-order product regardless of trying to time the market for lower prices.
3. Many potash producers have made production cuts in the past few months and this appears to be having a positive effect. For example, the average retail price per metric tonne for potash was about $675 in August, 2011, but it has since risen to around $710 per metric tonne. The uptrend in potash prices and production cuts should eventually lead to improved financial results for companies in this sector.
Key Data Points For Potash Corp., From Yahoo Finance:
Current Share Price: $42.67
52-Week Range: $38.42 to $62.60
Dividend: 56 cents per share which provides a yield of 1.3%
2012 Earnings Estimate: $3.58 per share
2013 Earnings Estimate: $3.81 per share
P/E Ratio: about 11 times earnings
The Mosaic Company (MOS) is another major producer of phosphate and potash. This stock does not appear quite as undervalued as Potash Corp. shares are because it offers a smaller dividend yield and the stock trades at a higher price to earnings ratio. The valuation of this stock should lead investors to see the rebound potential for Potash shares.
Key Data Points For Mosaic From Yahoo Finance:
Current Share Price: $53.01
52-Week Range: $44.86 to $75.42
Dividend: 50 cents per share which provides a yield of .9%
2012 Earnings Estimate: $4.21 per share
2013 Earnings Estimate: $5.53 per share
P/E Ratio: about 13 times earnings
CF Industries Holdings Inc. (CF) is one of the world's largest manufacturers of nitrogen and phosphate fertilizers. This stock has been in an uptrend and it recently hit a new 52-week high. CF Industries shares still look undervalued and investors should consider buying this stock on pullbacks as it is likely to continue making new highs.
Key Data Points For CF Industries From Yahoo Finance:
Current Share Price: $199.77
52-Week Range: $115.34 to $199.39
Dividend: $1.60 per share which provides a yield of .8%
2012 Earnings Estimate: $23.46 per share
2013 Earnings Estimate: $20.39 per share
P/E Ratio: about 9 times earnings
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.