RBC Defends Potash Corp.'s Valuation: $200 POT?

RBC Capital is out very positive on Potash Corp. (POT) noting that not withstanding the potential for short-term share price volatility, they believe Potash Corp.'s current valuation represents an excellent buying opportunity for investors with a longer-term perspective. Strong earnings growth potential, a 2009E P/E multiple of 8.9x and 2009E free cash flow of $7.3 billion ($24.13/share) represent a few of Potash Corp.'s many attractive investment attributes. Based on its long-term growth potential and the implied all-in return to their price target, they view Potash Corp. as extremely attractively valued.

Based on their supply and demand outlook, they generally expect fertilizer market conditions to remain robust through the medium term. With respect to concerns over the sustainability of high fertilizer prices, Potash Corp.'s management indicated during the Q2'08 conference call that they have not seen any signs of demand destruction under the current fertilizer pricing environment.

Potash Corp. is currently trading at a 2009E EV/EBITDA multiple of only 5.4x. This is at the low-end of the historical trading range even though (1) interest rates are at historically low levels; (2) the company's future earnings outlook has never looked better; and (3) there are no obvious signs that the fertilizer industry is heading for a cyclical downturn anytime soon. The firm also believes the market is not assigning any value to Potash Corp.'s future potash expansion projects, which they estimate could add $90-$95 per share of incremental value.

Reiterates Outperform rating and $375 target.

Notablecalls: Can you say $200 POT?

Comments

[will:]

Where were these jokers yesterday on the BS sell-off? It's amazes me that nobody defended Potash yesterday after record earnings. What a big farce. Should be over 250+ right not not below 200. Criminals everywhere.

2008 Jul 25 08:38 AM

[will:]

Now Credit Suisse also upgrades this morning, along with TD. These guys must have been sleeping yesterday during the conference call instead of buying! 250 right around the corner.

2008 Jul 25 08:56 AM

[David White:]

well: I egree. It does oftern seem that someone is trying to manipukate the stock. However, RBC did raise their target price estimate a few days ago, not today or yesterday. Today TD raised their 1 year target price for the stock to $350 from $280, which is a nice jump. Hopefully this is a sign of good things to come.

2008 Jul 25 09:02 AM

[Emerson:]

I'm with you guys! Yesterday I watched the selloff which happened so quickly that you couldn't even get a trade in and at one point hit $175 in a matter of seconds. This happened twice yesterday, one plunge right after the other and then came back up $30 to "stabilize" for the rest of the afternoon--oddly enough, just about where we are this morning. Someone or something was manipulating the markets.

2008 Jul 25 09:05 AM

[DAD08:]

Future expansion projects are not at all priced into the stock.
Stock is trading at the very low end of it's historical valuation.
Great entry point.

2008 Jul 25 09:08 AM

[David White:]

The June Durable Goods Orders announced this morning were up +.8%. The expectation had been for -.5%. This is great news. Further it is supposed to be the most significant economic news released today, so it bodes well for the overall market performance today.

2008 Jul 25 09:16 AM

[David White:]

So far today, grain futures seem generally slightly up. Oil is treading water. This seems like a situation that should allow a POT bounce. MOS reports early next week on Monday. A good result from MOS should add a little fuel to POT's fire.

2008 Jul 25 09:25 AM

[David White:]

I think the fact that most of the recording financial services don't seem to have updated POT's current PE yet may be playing a factor in the stock performance at the moment. The general public is still seeing a PE of 40+. In actuality the PE is around 30 at the moment. After next quarter's earnings (with the latest guidance bump) the PE will be around 20 at the current stock price. I think you can see that there is room for the stock to go up.

2008 Jul 25 09:45 AM

[David White:]

The consumer sentiment figures just announced were very positive (end of July's 61.2 vs June's 56.4). This beat estimates again. This is another good sign for the market today.

2008 Jul 25 09:59 AM

[David White:]

More good market news. The new homes sales figures were down less than expected (530,000 vs. an expected 505,000). This was still -.6% for June, but it is better than expected. Also the May new home sales were revised upward to 533,000 from 512,000. This is also a positive. Everything seems to be a go for the market today.

2008 Jul 25 10:03 AM

[David White:]

Further the US housing bill just cleared the final Senate hurdle. They are expecting passage next. Cramer thinks if this bill passes, it could mark the bottom of the real estate market. We should see a housing market recovery.

2008 Jul 25 10:06 AM

[David White:]

Of course, this is tempered by the news that foreclosures rose this month. They are now estimating that 2.5 illion homes will enter foreclosure this year. That is significantly up from 1.5 million in 2007.

2008 Jul 25 10:10 AM

[David White:]

Oil futures are again starting to go down. This tends to be bad for Ag stocks in general. Grain futures are still a little bit up in general today. This is still good.

2008 Jul 25 10:28 AM

[Urbane Gori...:]

For a business that includes natural gas as a major expense in production, and shipping as a major cost, you'd think that oil/gas drops would inspire a jump in price. Apparently, all commodities are lumped together.

jegan ;-)

2008 Jul 25 02:43 PM

[AxenFic:]

POT is a SHORT....if you really think they are going to Earn $20 - $22 per share in 2009 you guys are going to be in for a huge disappointment....Corn is rolling over, Farmers margins are getting squeezed (below $6 Corn they earn less than $400 per/acre and now Fertilize is supposed to double again???). The street is spinning this potential strike as a postive will give them the ability to raise prices further do to the fact that there is more scarcity.... Strike = rising wage costs and less Margins. Period. Good luck hitting the 2009 estimates....Corn doesnt grow to the SKY! I am not shorting here, i am going to wait for $220 again and start the postion

2008 Jul 25 03:03 PM

[AxenFic:]

The Best trade is to short POT go long TRA as a hedge (Lower Natty G is better for the nitrogen guys) but in general, its a way way crowded long and as the rotation out of materials/AG begins, this will also end badly....By the way, Dont give me the Changing DIET argument either...I am not saying that the BRIC nations wont eventually demand more Meats ect...but you are putting the cart WAY in front of the horse on this one...Diets will change, but it wont be overnight (Gap between Rich and Poor in China is still HUGE and the country is on the verge of a revolution...)....Pric... it all in to far....Corn breaks $5 the story has even more issues....SHORT ALL THE FERTS are as we like to call them, The Sh*t stocks

2008 Jul 25 03:07 PM

[RossQ:]

AXE: Your call looks great here and the hedge funds are liquidating winners to push up the bogus financials, thats it, thats your rotation. You are saying, this move in the financials, homebuilders and airlines. I have been in Potash stock since 2003. I have heard countless BS arguments against this stock being overvalued for years now, I love haters. One day they will be right, that day is not today. As for this Sh$t it all smelling like ro$e$ for now.

2008 Jul 25 03:47 PM

[RossQ:]

EDITED: AXE: Your call looks great here and the hedge funds are liquidating winners to push up the bogus financials, thats it, thats your rotation. You are saying, this move in the financials, homebuilders and airlines is for REAL :}.

I have been in Potash stock since 2003 and all along, I have heard countless arguments against this stock being overvalued , oh, I love haters. One day they will be right, that day is not today. As for this Sh$t it all smelling like ro$e$ for now.

2008 Jul 25 03:49 PM

[podiddly:]

Let's see...the Jul. 24th report shows a 216% net income GAIN (vs. 2007 same Q); a 220% net income GAIN per diluted share; an EBITDA
GAIN of 178%; all based from a Gross Sales Gain of 98%...: The Forward looking statements suggest continued "perfect" growth; and the expansions of both production, transport and inventory logistics (doubling Vancouver BD port facilities, etc.) were also consistent accomodating the REAL exponential increases in world demand.
-- and some of you are thinking that this is a short play?? Well, DUH...maybe...After all, UBS DOWNGRADED the stock's 2008 price target to $308.00!!

2008 Jul 25 05:16 PM

[will:]

This is a crime that potash is not over 250 right now. Doyle needs to step up and stick it to the hedgies/manipulators that having been playing with his stock and hurting shareholders. Doyle needs to put an end to this nonsense and now!

2008 Jul 25 07:09 PM

[bigtime99:]

I can't believe that people think a company with such incredible fundamentals trading at the bottom of its trading range is a short.
If you look worldwide it is difficult to find a company with such a bright long-term future.

2008 Jul 25 08:36 PM

[will:]

What a friggin joke! ACI rises 10% today on good earnings, not nearly as good as Potashes, but Potash fell 5% on theirs. What a f joke!

2008 Jul 25 08:46 PM

[t.o.:]

I am long pot and as i watched my streaming quotes yesterday morning,in what seemed like a nano second, they took pot from 205 to 190 dropping a dollar on the bid each time,or so it seemed as it happened so fast.To me,it looked like 2 things were going on 1-they were taking out all the stop losses down to 190 and 2-they were scaring the nervous longs into giving up their shares on the cheap.
The exact same scenario occured following their previous earnings report.
This company has great management and is in the sweet spot of a very profitable and long term industry;the fundementals are solid and the company is executing as one can see from their report.Spot potash prices are surpassing $1000 for the rest of the year;canpotex is expanding it's facilities and potash corp. is expanding its future production capacities.
Analysts put prices of 275/300/350 and so on,but these are just numbers.Remember the qcom days when the infamous $1000 price target was put on its head.I remember watching qcom go from $500 to $600 on the day that that price target was published;but alas,those were the good ol dot bomb days.
This stock is worth a lot more than $200/share.Unless the fundementals of this company/industry change,just put your shares under the matress and you will be handsomely rewarded.I have held my core position now for 8 months and will continue to hold on as there are not many better places to invest than in this company.
For the day traders out there,or the "investors" with a short term horizon,be careful as this stock, as you well know, has violent swings;for the shorts out there,please short more as you will ultimately aid in pushing the stock higher.Back in the dot bomb days,i had a friend who was short amzn.One morning a highly regarded analyst put out a ridiculous price target on the stock;by the time my friend could cover that morning he had lost 80 points.
So net/net,long term this story only gets better;short term,anything can happen in these markets.I don't buy and hold many stocks,but pot is a keeper

2008 Jul 25 09:25 PM

[RossQ:]

Terra Nitrogen, they reported the same day as POT and the stock was up big thursday and Friday while both POT and MOS were down. I didnt understand that at all. People are talking about current valuations too lofty and dont get me going about QCOM price target, QCOM's PE ratio was exponentially higher than potash's. People did just fine without CDMA, POT has 75% of the world's Potash supply, what ever that is, I guess we really need it to eat. Slightly more important than CDMA :)

2008 Jul 25 11:22 PM

[atotonilco:]

Pot has a "moat' that is impenetrable. Admiral Nelson's warships couldn't even get close. Short it and you will meet your Waterloo.

2008 Jul 26 10:48 AM

[investor88:]

Read with interest all the arguments for and against POT price. From a trading point of view [as opposed to long term holder], I would look for up momentum in the oil, commodities and agriculture/fertilizer sector before taking long POT positions. If I buy POT now for trading I will put a stop loss say 5% in case this is not the end of price correction.

2008 Jul 26 10:54 AM

[investor88:]

Just reviewed the 20day moving avg and the 50 day moving avg using charts provided by msn.money. Noticed that POT is below 20d and 50d m avg, further there is technical "dead cross" forming which to short term traders is a negative sign. Just a trader's short term observation, nothing is for certain when trading.

2008 Jul 26 11:08 AM

[David White:]

Apparently people are waiting to see if Congress effectively gets rid of the ethanol mandate. If it does so, most of the Ag stocks will be hurt. The grain prices have been pushed up by oil and by ethanol use to replace oil. If Congress does away with ethanol subsidies, the crop prices will likely fall dramatically. I am not sure this is a good thing at this time. I believe the US is a net grain exporter. If we can do away with a little of the oil importation (and export grain at higher prices), that is probably a good thing for the US economy. I think simple increased demand by quickly growing economies in the world is the biggest force driving oil up. There is also the problem that most US oil companies are not motivated to produce more oil. They can simply charge more for less, if they do nothing. Congress needs to figure out a good way to motivate US oil companies to produce more (some exploration may be required).

2008 Aug 01 05:24 AM