POT - Target Price And Comparison With Peers

Jul. 5.12 | About: Potash Corporation (POT)

A USDA crop progress report that showed worsening conditions in corn and soybeans, citing hot and dry weather across the U.S., is working as a catalyst for leading fertilizer stocks in the Agriculture sector. Corn particularly needs more fertilizers and farmers tend to use more of these fertilizers in worsening crop conditions. Shares of Potash Corporation of Saskatchewan Inc. (POT), Mosaic Co. (MOS) and Agrium (AGU) have been trending upwards because of this catalyst.

However, looking at the fundamentals of these companies, Potash Corporation of Saskatchewan Inc. appears to be a solid buy compared to its peers. Let us take a deeper dive into this Canadian company that makes and sells fertilizers and related industrial and feed products, mainly in the US and Canada.

Stock Price Performance

POT has traded in a 52-week range of $36.73 - $62.60. In the past 12 months, the stock has been down 19%, and 2012 YTD we have seen a 9% gain.

Past Earnings Performance and Future Expectations

  • POT reported Q1 2012 diluted EPS of $0.56, versus diluted EPS of $0.84 in the year-earlier quarter. There was a whopping 21% YOY sales decline due to reduced dealer purchases of potash. The company disclosed that they expect the global potash demand to reduce and lowered its EPS guidance from $3.4-$4.00 to a modest $3.20-$3.60 range.
  • However, POT's past 5 years EPS growth has been an impressive 39.64%. The revenue growth has been 18.27%. Looking at Trailing 12 Months, the EPS Growth has been 38.85%.
  • Potash Corporation's sales has been on a positive trend since almost the past decade, with an impressive compound annual growth rate of more than 18%.
  • The company's EPS during the same time with the exception of 2012, had been increasing at more than 50%. Dividends were increased at the CAGR of more than 16%. Free Cash Flow increased at more than 30% for the same period.
  • The company's EBITD Margin is an impressive 48.94%, and operating margin 42.97%.

The table below displays past and future EPS values.

2009 (Actual) 2010 (Actual) 2011 (Actual) 2012 (Estimate) 2013 (Estimate)
1.08 1.98 3.51 3.50 3.81
Click to enlarge

Comparison With Peers

Potash Corp has much better fundamentals compared to its peers. The key statistics are displayed below.

Price $45.07 $55.67 $90.82
Profit Margin (Q2 2012) 28.12% 12.48% 4.22%
Profit Margin (Trailing 12 Months) 34.40% 18.58% 9.27%
EBITD Margin (Trailing 12 Months) 48.94% 29.31% 16.36%
Operating Margin (Q2 2012) 35.11% 17.57% 7.11%
Operating Margin (Trailing 12 Months) 42.97% 24.65% 13.94%
Return on Equity (ROE) 36.03% 17.65% 23.59%
Return on Investment 24.83% 17.03% 13.29%
Net Income per Employee $497.9 K $269.1 K $101 K
Click to enlarge

Target Price

Considering the 2012 EPS estimate of $3.50, and a historically modest multiple of 16 times earnings, POT should be trading at around $56 by 2012 end.

The earnings multiple should increase as market improves towards the Q4 of 2012, and considering a 10% higher EPS of $3.81 for FY 2013, POT is destined to go much higher.


POT faces the following risks in meeting its 2012 and 2013 earnings estimates.

  • Reduced planted acres mean less fertilizer demand and hence overall reduced revenues.
  • Crop price volatility does impact capacity, as we have seen with Corn crop prices.
  • Weakness in the farm economies would have a generally negative impact Potash Corp's stock price.
  • If the U.S. Court of Appeals rules the antitrust suit against potash producers POT and its competitors could face some damages. However the exact impact of such a ruling has not been announced by the company and will remain difficult to estimate.

Disclosure: I am long POT.