The Better Performing Half of Potash Corp. (Part I) 15 comments
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In the year 2007, which might seem like ancient history to some people by now, Potash Corp (POT) reported 1,881.2 million as total gross margin. Of this amount, 912.3 or 48.5%, came from the over-hyped potash segment, while 968,9 or 51.5%, came from the under-hyped nitrogen and phosphate segments COMBINED, making them the larger contributors to the total gross margin. In other words, in 2007, the venerable Potash did not even live up to its own name, let alone my humble expectations.
A closer look reveals that, the total gross margin increased by 879.2, from a base of 1,002 in 2006, which equates to an 88% increase. Not bad of course, but the potash segment share of that total gross margin increase was only 351.2, up from its base of 561.1 in 2006, which equates to a 63% increase.
Meanwhile, comparing apples to apples, the nitrogen and phosphate segments' COMBINED share of the gross margin increase was 528, up from a base of 440.9 in 2006, which equates to a 120% increase. Now comparing apples to oranges, which both need fertilizers by the way, the potash segment share of this total 879.2 gross margin increase was 351.2, which equals 40% of the total. The lion's share, 528 or 60%, can thereby be claimed by the nitrogen and phosphate complex.
Obviously, nitrogen and phosphates are lifting this company up, while potash is holding it down. Amazing, when you consider the prodigious amounts of bear and bubble-babble about potash that we are all obligated to hear. It all reminds me of certain other well known types of fertilizers, often used on farms, in days gone by. Potash Corp. doesn't attempt to produce these types of fertilizers, as the excessively large amounts and easy availability of these agricultural products lowers their value, and history suggests that prolonged use of them will not generate enough long term profits to justify their use in the first place. If only more people realized this basic agricultural fact.
Getting back to the original purpose of this article, it seems that not only did the forlorn nitrogen and phosphate complex contribute more to the total gross margin, it also contributed more to the total gross margin increase, and from a lower 2006 base than the potash segment did. This resulted in a percentage increase that nearly doubled the potash segment increase. So this half of the company is also clearly growing at a much faster rate than the potash segment. Please note that not only did the weak 63% potash growth rate not measure up to the strong 120% COMBINED growth rate of nitrogen and potash, it also couldn't even measure up to either one alone, as the nitrogen segment grew by 70%, while the phosphate segment grew by 245%. It's worth mentioning here that both the 63% and 70% numbers were mentioned in the annual report, but not the 245% number. I actually had to figure that one out by myself. Even my 6th grade math teacher would be pleased!
So, from all this it's plain to see that last year, the paltry and unpalatable potash performance was clearly part of the problem, and not part of the solution for poor paradoxical Potash Corp. But then again, "that was so last year", wasn't it? Or, was it ?
In conclusion, I am of the opinion that the disappointing 2007 stock performance of a feeble 201% gain can only be attributed to the general failure of the investment community to fully understand where the profits of this company were actually coming from. The extremely unlucky association in the haplass minds of deluded investors between the under performing potash segment and the company's ill-chosen name, has conspired to hold this unfortunate company's stock down to unrealistically low and unsustainable valuations all year long. The malevolent manner in which this was done has an uncanny resemblance to the fate of the deluded sailor in "The Tale Of The Ancient Mariner", when he foolishly tied that damned albatross around his very own neck, in the vain hope of preventing his own self-created bad luck from befalling him.
Just imagine what could have happened if the company had changed its name to "NitroPhos Corp." instead of Potash Corp. Then all of Wall Street's wonder boy analysts would have been calling it a big bad bubble by now, and we would all be fabulously rich from all the juicy profits from the nitrogen and phosphate complex, "The Better Performing Half of Potash Corp." annum 2007. Coming up, Part II.
Disclosure: Author holds a long position in POT
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This article has 15 comments:
Are you sure you did the math right?
Perhaps you used to take an apple to school instead of doing your homework. But seriously, thanks for the info.
So potash is just under 50% of the gross margin while nitrogen AND phosphate equaled the other 50%. You do realize that nitrogen and phosphate are two products and potash is one product correct? Also POT's Bill Doyle has been stressing how potash has been under applied worldwide, ( perhaps with a slight exception in the US), meaning that the potential is there for much more return.
Nitrogen is a fertilizer that just about anyone can get into and it consumes a lot of natural gas. Phosphate and Potash are unigue because there are only so many places on the Earth that you can find these deposits.
To say that potash is holding back a company that is generating just under 50% of its revenue is odd, especially when you compare it to nitrogen and phosphate numbers combined. Why not break out each individually and see what the real comparisons are?