Potash Corporation Of Saskatchewan: Patience Needed For Impressive Returns

| About: Potash Corporation (POT)

By Fani Kelesidou

Founded in 1953, Canada based Potash Corporation of Saskatchewan (NYSE:POT) is a leading producer of crop nutrients, such as potash, phosphate and nitrogen. The company sells its products directly to retailers, cooperatives, distributors, and other fertilizer producers. It holds the right to mine over 844 thousand acres in Canada. Potash is responsible for about 11 percent of global potash production and 20 percent of global potash capacity. It is the third largest producer of phosphates and nitrogen worldwide. Last year, Potash produced 2 percent of the global ammonia production. It has strategic investments and operations in seven countries.


Q2 2012 financial results show an overall balanced position. The only setback to the otherwise strong performance was a $341 million impairment charge due to investments in Sinofert Holdings Limited (Sinofert). POT reported second quarter earnings of $522 million, or $0.60 earnings per share. Accelerated offshore potash demand and profitable contribution from the nitrogen segment resulted in a gross profit of $1.2 billion. Second quarter's gross margin was the third-best quarterly total in the company's history.

Potash expects total shipments for the full-year to range between 8.8 and 9.2 million tons. For Q3 2012, the company estimates potash production to decline slightly, mainly because of scheduled maintenance. As a result, the segment's projected gross margin is between $2.6 and $2.8 billion. This decline is expected to be counterbalanced by improved phosphate margins. For fiscal 2012, the combined phosphate and nitrogen gross margin is estimated to account for $1.4 billion to $1.6 billion. In this context, Potash expects third-quarter net income per share to be in the range of $0.70 to $0.90.

General growth performance and profitability of Potash

The Q3 2012 EPS Guidance recently issued by Potash did not exceed analysts' expectations. Nevertheless, historical EPS data indicate that Potash is among the pioneers of the industry. Over the past 5 years, earnings per share figures followed an upward pace. Furthermore, EPS is expected grow up at annual rate of 10.55 percent for the next years.

Sales have grown on an average rate of 18.27 percent for the past five years. ROA and ROE figures are also encouraging. Return on assets stands at 15.27 percent and return on equity at 30.32 percent. Moreover, Potash has a net profit margin of 50.04 percent, which is higher than the industry's average of 44.00 percent.

Recent Performance

Following U.S. government's reports on an unexpected drop in global corn inventories due to the Midwest drought, corn prices jumped higher. In turn, this recent price surge boosted fertilizer stocks. Currently, Potash is trading at about $42 with a Beta of 1.01. 52-week range is between $36.73 and $51.96. Price-to-earnings ratio is 14.71, while forward P/E ratio is 11.36. Year-to-date stock returns of 2.85 percent are low, especially when compared directly with Potash's major peers. However, 3-year average stock returns of 42.28 percent reveal a relatively stronger performance. In addition, Potash is ranked among the top dividend payers in the industry. The stock yields 2.02 percent, while the industry as a whole has a dividend yield of 1.60 percent. Recently, the company approved an increase in its quarterly cash dividend from $0.14 per share to $0.21 per share.

Investor Sentiment

Out of 33 analysts tracked by Reuters, 10 indicate an "outperform" rating, whereas 6 recommend a "buy" rating. 12 analysts indicate a "hold" rating. Overall, the consensus recommendation derived from past 3 month ratings is positive. The average mean analysts' target price is $52.49, suggesting upside potential of 25 percent.

According to the Future Earnings Discounted Plus Equity Model, the estimated fair value of Potash ranges between $47 and $58. At a price of around $42, Potash is undervalued. The FED+ fair stock price valuation indicates that the stock has at least 11 percent upside potential to reach its fair value.

Future Prospects

Although certain notable items negatively impacted the company's most recent financial results, Potash is still a lucrative investment.

Potash anticipates benefits from the drought conditions in the U.S. High crop prices, and the resulting inventory shortage is going to enhance demand for its products. Moreover, the company generates income from offshore operations. Potash's investments in Jordan, Israel, Chile, and China, contributed to Q2 2012 earnings by $133 million.

In addition, Potash benefits from operating in less known places of the world, such as Trinidad, where raw materials are very cheap. Also, the company is expanding its mining operations in New Brunswick. Once completed, this new mining facility is estimated to have an operational capacity of 1.8 million tons per year. The mining rights provide Potash with a competitive advantage in reserves' surplus.


Overall, there are strong reasons to invest in Potash. For several years, the company has been investing in an expansion process. I expect the fruitful outcome of this strategic operational expansion to be visible in after the Q4 2012 financial results. The stock did not perform well this year so far, but long-term prospects look bright. There is an ever increasing demand on agricultural products and Potash is well positioned to take advantage of this trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: EfsInvestment is a team of analysts. This article was written by Fani Kelesidou, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.