The 2008 Historic Potash Handoff (Part V)

Jul.16.08 | About: Potash Corporation (POT)

The next step in this ongoing series of articles on Potash Corp (NYSE: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.