The 2008 Historic Potash Handoff (Part V)

The next step in this ongoing series of articles on Potash Corp (POT) is to look at the 2008 first quarter results for the total gross margin. For the period, the total gross margin was 856.0 million, which was a 131.5% increase over the the 2007 first quarter gross margin, and a 60% increase over the 2007 fourth quarter gross margin. Of this amount, an impressive 514.6 or 60% came from Potash, while 185.4 or 22% came from Nitrogen, and 156.0 or 18% came from Phosphate. So, the combined total contribution of Nitogen and Phosphate, 341.4 or 40%, could not measure up to the 514.6 or 60% contribution of Potash. Here can you see, that something important has already happened in the first quarter of 2008. Potash has suddenly made a big comeback, compared to its 2007 performance. This is what I believe will be called the historic hand-off to Potash, that marks the point when Potash first started to run with the ball. It is from this point, and not some point in 2007 or before, when Potash starts to completely dominate the other two segments, and thereby the whole game plan of this company, as management has indicated all along.

FOR THE SAKE OF ARGUMENT ONLY, I would like to take the liberty to pinpoint this hand-off event as occurring on January 23rd, 2008 at the stock price of 120, and the 50 day moving average at 127. The purpose of this exercise is to establish an easy-to-relate-to group of numbers that represent the bottom of the January 2008 panic and subsequent sell-off. The stock price was then only 94.5% of the 50 day moving average, or for those of you who like to measure things from the other side, the stock price needed to increase by 5.8% in order to equal its 50 day moving average.

Another reason for the pinpointing of this date and stock price is to capture that moment that was the darkest moment before dawn - also known as an excellent buying opportunity for wise and seasoned investors.  It is on this day, and not some other day in 2007, that Potash begins its long overdue journey of redemption, by finally getting the hand-off and running with the ball.

Taking the stock price of 120, on January 23rd, 2008, and comparing it to 228.51, or the closing price on Monday, July 14th, 2008, reveals that the stock price has increased by about 90% in slightly less than the six months since the historic hand-off. Is this stock still undervalued? Keith Carpenter at Canaccord Adams seems to think so. In a July 10th article, "Canaccord Adams Bullish On Fertilizer Companies", he gave us an "outrageous" price target of 425. Judging by the paucity of colorful blog replies, apparently the Potash Bears were in summer hibernation that day, or else they accepted his reasoning. He arrived at this number by applying a multiple of 17 times to his earnings per share target for 2009 of 25,21 (canadian dollars) His number is very similar to a number I get by the very unprofessional and generally unacceptable means of multiplying the 2007 year end closing price of 143.96 by 201% to equal 433.3. This number however is neither a prediction nor a promise, as it is merely a means to compare the stock prices of 2007 to 2008 as it unfolds.

By this measurement the stock has only increased by 58.73% year to date Monday, July 14th. Therefore, it should be more than double, (288) by now, or it's not keeping pace with the "lousy" 201% gain in 2007. As management has indicated that 2008 will surpass 2007, and that 2009 looks set to surpass 2008, Mr. Carpenter's number seems quite conservative to me. Management is, of course, talking about the company, not the stock price. They have however, on other occasions expressed their disappointment in the apparent inability of the stock to consistently trade at a much higher multiple than its peers in the fertilzer business.

I don't usually speculate about specific stock prices by specific dates. It is only the remarkable closeness of the two numbers that inspires me to do so at this time. Besides, in the interests of fair play, this provides the sleepy summer Potash Bears with a unique opportunity of pelting two Potash Bulls with one clump of sun-dried ammunition, of their own making.

For me, the company is one thing and the stock price is another, and I don't believe in considering the two as one. Further more I focus on the company, as the stock price at any moment only represents the mechanism that brings the supply and demand of the stock into a relative balance, for that one moment in time only. The financial health of the company, on the other hand, is the result of a whole different set of price mechanisms that govern all its operations.

Comments

[strawtogold:]

Banks that report billion dollar losses go up 30% in one day. POT announces that worldwide prices for their product have been increased to over $1,000/ton (an increase of 300% within a 12 month period), guidance by every major investment house is increasing current year and 2009 earnings per share by several dollars per share almost weekly, with very little risk of loss of market share or sales volume a 2009 EPS in excess of $25 can be conservatively assumed, and the bears drive the price down. Next year, will we see the first ever company with phenomenal earnings growth show a P/E ration in single digits? The bears would love that.

That is the problem with looking at a stock hour by hour or day by day. There is no way this isn't a $300+ stock when EPS will exceed $25.

Author should have spent more time on future earnings projections based on known sales prices.

2008 Jul 17 12:19 AM

[windinmyface2:]

So what was the moral of this story?

2008 Jul 17 12:59 AM

[User 58419:]

The moral (although not from the above) is to watch the daily chart and to buy POT on the dips now and enjoy the ride to 270.

2008 Jul 17 04:42 AM

[Clavis:]

Oooooooooh, we are lost now, original thought, potash good phosphate bad, then told phosphate good potash bad, now potash very good phosphate very very bad, Oooooooooooh!

2008 Jul 17 08:19 AM

[Carl Martin:]

Readers should understand that, the editors at SA have altered the title somewhat, as well as leaving out the last three paragraphs, there fore you are not being allowed to see and read this article as intended. As such don't be surprised, if you feel left hanging or that you feel something valuble is missing. Perhaps,I should blog the entire article as it was originally written. There is a concept called freedom of the press.

2008 Jul 17 08:59 AM

[Carl Martin:]

To "Strawtogold"
The author does not disagree with Mr. Carpenter on anything. The "outrageous" refers more to my own sense of humor and irony, and does not reflect my opinon of any of his numbers. I think your blog is very noteworthy.

2008 Jul 17 09:07 AM

[Carl Martin:]

To Clavis,
You might need to read my articles a few times, as they are not that easy to understand. I don't recall writing what you apparently are reading. Maybe you are reading something of your own in my articles. I don't know, it seems like almost everyone is doing this. To try to set the record staight, Nitrogen and Phosphate have been very strong in 2007, and it looks like they will remain so in 2008. Potash has been relatively weak in 2007, and is expected to be very strong in 2008, and much stronger than the other two together. It is not me that is confused, it is the investing public, and especially the Potash bears. If people understood this stock, it would be trading at much higher multiples. Those aren't just my words. Management has always been saying this. They can't understand why investors can't see the light and buy the stock now, and then just sit back and enjoy the ride. Just watch and wait for the July 24th numbers. Then we will all know for sure.

2008 Jul 17 11:00 AM

[LT Investor:]

How does the price of oil affect POT? I've read that higher oil price also means higher cost for fertilizer makers. If oil resumes going higher, is this a worry for POT?

2008 Jul 17 11:12 AM

[hilakos:]

Oil prices factor in thru natural gas pricing. Nat.gas is consumed in NH3 production at between 33 and 40 DEC's per ton. PCS has low cost source for some production in Trinidad, and uses hedges for US based production.

2008 Jul 17 01:56 PM

[pothead:]

Hey Carl,
How long are you going to continue to write these worthless articles? As is they weren't lonmg-winded enough to begin with, now you've just got to post here and comment on your own writings. Nobody wants to read this. You said enough in your Part V to garner some laughs (at you), but apparently that wasn't enough for you as you continue to to bore us with your comments. Gee...I can hardly wait for parts VI through XXXXVII.

2008 Jul 17 04:35 PM

[pothead:]

Carl's not confused, just we morons who read his ramblings are. Whatta riot.

2008 Jul 17 04:38 PM

[Carl Martin:]

Pothead,
Could you please offer some facts to back up your opinions. Opinions that aren't supported by facts have no value to others, therefore we others can only assume that your comments are only meant to please yourself, and not others. Why not contribute something of value to the general public? I can only assume that you are a potash bear. The Potash bears have never produced the facts that support their position, simply because there are, NO KNOWN FACTS, to support their position. Therefore they attempt to argue with others on the basis of opinions. It all results in a contest of who can shout the loudest. The Potash bears have painted themselves in the corner and experience much pain because of it. When an author chooses to expose the plight of the Potash bears in a series of "slow,difficult to understand, long winded articles," that establish the long term bull case, through the methodical process of laying down undeniable facts; Potash bears will begin to experience ever increasing levels of anguish, as the circle closes in on them. Make no mistake, You are being subjected to a written version of the chinese water torture. You can avoid this unpleasentness by either not reading the articles, or changing your position. Your present level of pain is obvious to us all. Why don't you stop torturing yourself in the public space at SA. Only a fool would torture himself in front of others in order to get attention. Most adults left that kind of behavior behind in their childhood, but obviously some others did not. Apparently you feel threatened by my writings. As fear is born of ignorance, it is clear to us all, that you don't understand what I'm writing. Therefore, I wrote an article on a level that any well adjusted six year old should be able to understand. However, many of the Potash bears could not understand the article, and wrongly concluded that the article was condescending to them personally, as they chose to identify themselves with the six year old, that the story was written about, not for. When a person functioning on the level of a two or three year old, suddenly starts identifying with a six year old, then adults refer to this person as being pretentious. Pretentious is one of those adult words that means - trying to impress by pretending to be more important or better than one actually is. The fact is, the article was way over their heads,and the proof is, they did not understand it. I don't expect you to actually understand any part of this blog either, as it is clearly way over your head. All others will easily understand it, so it's written more for them than for you. You have hereby been exposed!

2008 Jul 18 05:43 AM

[Muzie:]

I tried to go to your website, but is apparently doesn't it. There is a "My website" link that actually is invalid, I would suggest you remove it or change it to a valid address as it is a bit confusing.

2008 Jul 19 01:12 AM

[RRealtyPro:]

Hey Carl, I found your series on POT interesting, and, useful in my decision making on POT. Thanks!

2008 Jul 19 10:34 AM

[mw92101:]

Carl,

Your articles do confirm the facts. Management of MOS has dropped Nitro and commited to the very long and expensive process of new Potash mine development, which could take 6-10 years. Considering it takes BILLIONS to develope a new mine for pot, either management is taking one of the worst bets in history, or they are confirming the long term expected divergence in supply and demand. With world populations growing at exponential levels, and the fact that MOS's management is highly experienced and capable, it appears to be a good bet that stock prices will have to catch up with fundamentals. It appears that recent trader bears in these stocks have the thought that a world-wide economic slowdown will cool the prices of fert just like oil. However, VMI's reported earnings last week were good enough for the stock to "correct" 15% up. Irrigation equipment is another segment benefiting from this overall trend. It appears that bulls are taking a wait and see approach, while management and fundamentals just keep raking in more and more cash. Notably, the largest single investor in MOS, Cargill, hasn't sold a single share. Mr. Market will decide very soon if these stocks are under or over valued based on the "facts" in the earnings reports upcoming. Then, at least until the next earnings release, opinions will become less important in setting the stock price. Just my 2 cents. Thanks for your informative articles. I appreciate them being based on facts and taking into account the trading versus the fundamentals issues.

2008 Jul 20 12:11 PM

[Carl Martin:]

Muzie, Thanks for the helpful feedback. I don't have a website at present. I thought that myblog.com was a system to use for people without websites, like the use of "poste restance" in the international postal system, where world travellers can receive personal mail at their next intended destination. I'll get it fixed along with some other matters, like the heavy abuse at this website, when some of the editors from SA return from summer vacation. I'm glad your brave enough to enter the mud bath. Stay clean, and you can contact me through blogs, if you want to

2008 Jul 21 05:16 AM

[Carl Martin:]

MW92101, Nice blog, why don't you expand it and turn it into an article. All you need to add is disclosure of your position, as required by SA. The only part I don't agree with is your 2 cents evaluation. Your blog is worth exactly as much to any other investor, as they eventually make (or lose), by following, (or not following) your line of reasoning, accepting (or not accepting) the facts you have presented, topped off by your conclusions, which of course represent your well founded opinions. An investment in MOS right now, might well result in a short term loss somewhere in cyber space in the near future, which only an idiot would grab by selling into it, (and then of course holding all others responsible including authors, articles, management,charts, markets etc.) These fertilizer stocks, especially those with Potash are the "no brainers" of this decade. All you need to do is buy at the market price, no matter how high and "over-valued" that may seem to be and hold, at least 5 or 10 years, until the supply of Potash has even a reasonable chance of equaling the world wide demand. Then you might just start thinking about, considering the possibility of, selling part or all of your enormous profits, or just continuing to hold even longer, because by then the world wide demand, having also increased considerably, might well still surpass the world wide supply.I'm long on MOS and almost all other agricultural investments, especially fertilizers and seeds, which feed each other. The more effective the seeds are at mining the soil for nutrients, the more nutrients (fertilizers) are needed. The higher priced and more effective gene-spliced seeds are bought with the extra profits that, the smart farmer makes from using ever increasing amounts of fertilizers. The vast majority of the world's farmers are not that smart yet - China, India, Brazil, Indonesia etc. That's why the world has an agriculture crises on it's hands. Do you want to be part of the problem, one more noisy yapping mouth to feed, or part of the solution - a well informed investor, who bases investment decisions on FACTS, not opinons. RRealtyPro just beat all the slower readers. Now he gets the benefits of everyone, who buys in at a higher price, but not the ones who buy in at a lower price. Someday soon, all buying and selling will take place at a higher level, and never return to the available price today.

2008 Jul 21 06:45 AM