As With Fertilizer Commodities, POT Bubbles 31 comments
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Yes, this is about #2. At least the chemical equivalent. So let’s get the jokes out of the way first…
Whenever one stock grows enough to represent an inordinately large percentage of the index it belongs to, you know there is some major dislocation going on. And it is about to be corrected.
Right now that would be Potash (POT), the fertilizer company from Saskatchewan, Canada. Potash is now the 2nd largest company on the Toronto Stock Exchange at $60 billion capitalization. The largest is RIM (RIMM), which along with Potash has been the engine that has propelled the Canadian indexes higher in 2007 and so far in 2008, almost unassailable.
From the bottom of the bear market in early 2003 to recent times, Potash stock has given the lucky few to have ridden it loyally higher, a “20 bagger”:
The problem is that right now it is priced for utter perfection. And if the world is one thing, it is imperfect. For one, there is no reasonable logic to its valuation.We have more than ample reserves yet to be mined. In fact, according to the International Fertilizer Association (who should know), at the current rate of use, we have enough proven reserves to last us another 300 years.
And strangely enough, inflation-adjusted potash prices have continuously and consistently fallen over time. It is only in 2007 that we’ve seen an exception to this with KCl (potassium chloride) prices tripling. This is a response to a similar rise in the price of sulfur and natural gas (raw materials) for potash.
To bring back some perspective to this, consider a research note from Merrill Lynch saying that if we add together the capitalization of the 3 large fertilizer companies: Potash, Mosaic (MOS) and Agrium (AGU) we have a value larger than the sum of the value of all potash ever mined and sold in modern history!
During the tech bubble of 2000 many Canadians remember how the TSX index was pulled higher by Nortel (NT) to levels it wouldn’t have attained by its own accord. But POT’s meteoric rise makes Nortel’s look pathetic in comparison.
If you were lucky enough (or smart enough) to buy Nortel at the 1998 October bottom - around $75/share - and repeat the miracle of perfect timing again to sell at the top, August 2000, at around $830/share, you would only be boasting a 10 to 11 “bagger”:
If you have been fortunate enough to be long Potash, the good times may be over. Time again to look for what most are ignoring.
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This article has 31 comments:
other have CONTRACTS for the rest of the year. The contracts with
Brazil, India and China are DONE. Forward EPS is all but in the bag.
And you can bet that India and China won't make the same mistake
twice with waiting until the last minute to negotiate their deals for
2009. Same price for 2009 at minimum, or slightly more. Either way,
CanPotEx is well in control.
There may very well be a price bubble - I'll even agree with you that
there is. However, the oil "bubble" that we are in, started when
Katrina hit. 5 years ago. Maybe it's taken a little longer for the price
of black gold to rise 100% (anyone remember $60 oil??), but the
thirst needs to be slaked. Similarly, the fields need to be made
fertile.
The housing price bubble that just popped started before the tech bubble - 10 years ago.
The tech bubble came and went in a matter of 4-5 years - 1996-2000, but it lasted that long. Call it a bubble. I agree!!!
A bubble is formed during that period in which demand outstrips
supply and the psychology of buy now or pay more later enters.
Regardless of the market cap (so what!!) of the Ferts right now, the
need (demand) is real. People seem to want to eat. Go figure.
The currently available supply (the rate they are pulling the stuff out
of the ground and putting it on barges) is limited. In the mean time,
POT, MOS, AGU and all of the others will continue to make hay while
the sun is shining for at least the next few years. (I love the few ag
jokes I can inject like that!)
If the bubble pops as new supply comes on line in 3-5 years, I can
live with that. In the mean time, if they can get $1K a tonne, please,
bubble me!
In the mean time bubbleheads, a supply and demand imbalance
exists, prices are rising whether it is right or not, and the pricing power
of these companies for the next 24-48 months favors the sellers, not
the buyers.
People are going to eat. They can reduce their fuel consumption marginally, but choose generally not to at this point.
When gasoline becomes extravagant, folks will STILL ride their bikes
to get food to eat. Food grown with FERTS, by farmers that need to
increase and keep their yield per acre as high as possible.
Be a bubblehead. Just be an informed bubblehead!
Doesn't this mean that everyone with an acre to till will be trying to cash in even more so than they are now? As demand for ethanol increases, the price will rise and so will the cost of fertilizer. I would think companies like Monsanto, creating new drought resistant corn, would fare even better.
Other side: an ever increasing population in foreign markets that demand more agricultural and meat products. The 'penetration rate' is still low. ie. there is a lot more potential ahead for POT as the population of ppl with disposable income abroad rises everyday.
Secondly, POT is going to hit $1000/tn...it's just a matter of time.
Thirdly, unlike tech or housing, the potash sector is controlled by a small handful of global players. These companies are going to work to keep prices high since they hold a monopoly over potash reserves.
There may be 300 years of Potash in the ground. That is a good thing for a potash mining company that owns those resources or leases them. Income = value at the end of the day. Hedge & private equity may play with the stock but when all is said and done its income that creates value. If you would do just a bit more research you would find that currently yearly production (that potash that can actually be removed from the earth in a year) is short demand. This is evidenced in the fact that we have seen a 100% increase in potash/ton pricing since Nov 2007. This is the reason a farmer or industrial user would pay more. This, short of a monopoly situation, is the only reason anyone pays more for a product. This is even more true in the case of quasi commodity products like fertilizer. The current potash/ton pricing direct from the companies sales sheet effective June 1st from their warehouse FOB is $565. If you are unsure email investor relations and they will produce a copy for you. Additionally, there are many indicators that this price will press beyond this level over the next 12 months and further upside over 24 months. See JP Morgan, RBC, Citibank analyst recent comments and income and price targets. If you have not seen Bloomberg, NY Times, or any other major business or general news provider recently you would not know about all of the chatter of food shortages around the world. Americans feel it last as they typically have enough money to outbid poor nations for food. I don't mean to be overly critical of your article. Your analysis is that of a freshman college student trying to bluff there way through an economics 101 exam. Pot was selling at retail once it hit the $215 area. Fast money doesn't have much patience when they don't see much more upside and therefore you see POT today at $180. They are banking there profit and some are moving on. We have no guarantee by far that we will hit $1,000/ton potash. However, I don't see many shorts on POT and there is a reason for that. Nice try kid. I am sure you could have constructed a better negative argument for POT. Not a strong one but at least one with some logic to it and without so many elemental errors. Next time do some more work before you talk and someone might listen.
Also, I remember when oil hit 60 USD/barrel many of your colleagues played the "bubble" card and predicted a return to 35$ oil. I wonder if they're still willing to stand by this claim.
Unfortunately, I guess the shorts like this stuff and they attacked IPI yesterday and I hit all my stops. I'll be back when all the short-sighted, (pun intended), people get smacked around some more.
This so reminds me of Boone Pickens saying "oil will be $85 by May". Hey Boone, how ya doing with them oil shorts?
While breezing through some of the other companies mentioned in this article, I noticed this disparity:
TTM PEs:
AGU = 23.3
POT = 38.9
Any other Potash producers worth looking at?
Few Lifosa's fundamentals after 20081Q results:
Revenue grow +110% (y/y)
Net profit grow +780% (y/y)
PE 4.6 (ttm)
Debt/Equity ratio 0.15
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One and only reason, why it is so cheap, it's small free float of less than 5% of shares, while main holder Evrochem owns 91% stake.
PS. I am a backyard gardener. I do not use any chemicals or fertilizers in my garden. I use compost made by worms! The stuff is FREE and grows nice vegetables and flowers.
PPS. Have any of you ever heard of the Ratio Price to Book Value...or Price to Tangible Book Value? You should look it up.
On May 01 06:44 PM Erin Young wrote:
> Seeking alpha is the same as posting on the Yahoo message board,
> any moron can post a message on it. After reading this piece, I prove
> my point.
If you look back to Jan 16th it did the same thing. Ran up and sold off back to the 50 DMA. It took 5 trading days to hit bottom and 5 to come back to its previous high. That is a fast turn around. This time around we hit major resistance on day 4 (May 1st) at $175 instead of the $168/share 50 DMA. This occurred with considerable negative chatter of the FED putting future rates on hold, commodity crashes and random deception and ignorance across the board. In the end Income = Value. It might not be a straight line but income will always assert itself.
I believe we will hold on Monday May 5th and 5 days out we will be in the upper 190's or low 200's back were we started on April 28th. I believe we will not return to the magic $168 / 50 DMA this time due to all the positive information about 2008 earnings and 2009 earnings. JP Morgan who has seldom missed a call and has POT 2008 EPS at $11 and 2009 at $18/EPS. Gas & oil trust, tankers, and utils that are valued solely on current income have higher PE's then this with low growth.
So what if hedges and private equity want to "sector rotate" selloff for greener pastures (faster profits). Who can blame them; they are up $40/share on 1,000,000 shares or more typically. Most of them need to grab whatever money they can after all the losses they have taken on financials, homebuilders, insurance, ect. We still have 73% Institutional ownership on POT, 64% on MOS, 58% on AGU and who knows how much on the new IPO deal (IPI). Retail ( that is us ) and the long money institutions are not going anywhere anytime soon. Why would you sell off now when you have an 64% EPS increase coming next year.
The correction happened and it will not last long. Potash prices are real and not speculative. Israel just sold $650/ton pot to China last week.
No shorts in sight as of last week POT has 1% short float, AGU has 1.12%, and MOS has 2.68%.
Compare this to say Lennar Homes of 26%, Citi Group 12.85%.
Now think IBM short float 1.28%.
Which camp is POT in?
Best Regards,