Potash Corp. Update: Time To Buy?

I wrote earlier that I'd once again look at Potash of Saskatchewan (POT) if it got to $150. It was just over $151 today. Since I first wrote about POT at the end of July, a number of negative events mentioned as risks in that earlier post transpired.

1. A strike commenced at three of the company's potash mines. The company's strike updates are here.

2. Grain prices have fallen, as has the price of oil.

3. Sulfur prices have risen.

As POT's competitors, like Mosaic (MOS), have also suffered steep declines in their share prices, the strike doesn't seem to have much of an effect so far (and might not have an effect at all). It's falling crop and oil prices that have pushed the stock down.

Fertilizer prices, meanwhile, seem to be on the rise. Potash has risen to $763 a tonne (1,000 kilograms) in July from $525 in June, according to Globe and Mail. Just recently, China raised the export tax on urea and ammonia to 150%. This should boost nitrogen fertilizer prices worldwide.

The analyst consensus for POT's 2009 earnings stand at $21.29 a share, which has increased by a cent from a month ago. The low estimate is at $15.50 a share. POT is currently trading at just above 10 times the lowest earnings estimate for 2009.

The rising sulfur prices may crimp margins. The mine strike may result is lowered output. It is unclear if analysts have incorporated POT's output in their estimates or whether they are expecting earnings gains to come mostly from margin growth.

The world needs food now and will in the future. All the positive aspects of investing in POT that I mentioned in July are still valid. So POT looks like a pretty good long term investment here, though I will continue to wait for a lower price. If POT can meet earnings expectations, it's starting to look pretty cheap.

The biggest risk is the continued slide in crop prices. If you believe this isn't a deflating bubble but rather a short term correction in a much longer agriculture bull market, it may be a good time to start buying POT.

Disclosure: I don't own any of the securities mentioned above.

Comments

[johnthebear:]

I like TNH much more than POT due to lower PE

and very high dividend.

Now trading at $123, coming off a recent correction at $96 and headed back to the recent high of $171.

This is one of those very high dividend stocks that you need to make a major part of your portfolio during the next 3 years of down markets and low interest rates on savings. I consider this a very safe place to store money with great capital gain potential.

POT now has a PE of 23 and was as high as 60 and almost no dividend.

TNH now has a PE of only 8.8 which is cheap by anyone's standards.

So why buy POT?

2008 Sep 04 11:48 AM

[urbanhiker:]

Nothing new here

2008 Sep 04 05:57 PM

[J. Fredrickson:]

Don't buy TNH. Look up how they structure that. There is a reason why it has declined from $171. Anyone who tells you it has a low pe and great dividend doesn't have a clue. Sorry John.

2008 Sep 04 07:54 PM

[User 256041:]

Im not so sure your accessment of POT is correct. I think this labour dipute has everyone guessing as to what will happen next with this stock.It is in selloff mode right now and smart investors will get out now and jump back in when this strike is settled.Why ride a loser to the bottom,get back in at the right time and make a very nice profit doing it,you will not be disapointed!

2008 Sep 04 10:36 PM

[johnthebear:]

Fredrickson, did you know that TNH has a dividend of 12.1% and a PE of only 9.03 today after rising 3.27% to $125.70 per share? That happened on a day when the Dow was down 344 points. Earnings are growing with a profit margin of 42.68% and return on equity is 140%. Most investors will feel that this is very impressive record in an industry that is strong and growing.

You sound like you think you know something that I should know?

I really would appreciate it if you could tell me and readers of SA what I am missing.

2008 Sep 04 11:44 PM

[el zorrow:]

ACCUMULATE NOW ...BUY CALLS...INCLUDE AGRIUM...

2008 Sep 05 01:48 AM

[einstein p ...:]

I bought TNH at 98 and am holding it for the dividend. POT and MOS are both cheap at these levels. If you are worried about the strike buy some MOS at 87.50. I did yesterday, along with some POT at 147.50. When the hedge funds are done selling every commodity and infrastructure stock they own and the panic selling subsides, these stocks are going to move up very quickly.

2008 Sep 05 08:53 AM

[Tim Plaehn:]

Concerning TNH. Terra Industries owns 75% of the shares and at current levels take 50% of the distributable cash on the shares they do not own. If you like TNH, TRA is the better option, IMO. Check out my articles here or on my blog concerning TRA and TNH.

2008 Sep 05 08:58 AM

[weiwentg:]

If I was going to buy a potash producer, it would be POT. potash is a commodity, and POT has the largest reserves. that gives them a competitive advantage over everyone else.

2008 Sep 05 08:58 AM

[anopenmind:]

Does the amount of continued slide of corn prices equal amount of reduction in acreage planted and equal amount of potash demand? In other words, is it reasonable to say price of Potash & other fertilizers stocks, same 38% lower than 3 months ago, parallel their projected sales and profits through next spring's planting season?

2008 Sep 05 11:56 AM

[johnthebear:]

DID YOU NOTICE THAT TNH IS NOW $133, UP $7.30 TODAY! (5.81%)

2008 Sep 05 03:02 PM

[Umm, yeah:]

Lol, congrats, Johnthebear! (no need to shout)

Btw, POT went up +11.66 (7.75%) after almost being down as low as 145. Would've been a great day to trade it.

2008 Sep 06 02:34 AM

[Mcgyver:]

Tim Plaehn said the same thing prior to the second quarter and was wrong, shareholders received 75% of the distributable cash or $3.63 a share. Its based on a fixed sliding scale that is published. Even in the scenerio where 50.5% of the distributable cash is payed to shareholders its still damn good, higher than TRA. TNH's float is very small which makes it very volatile. I believe it is still a better play then POT, MOS or AGU.

2008 Sep 07 01:01 PM

[bankarb:]

This selling has nothing to do with fundamentals. Hedge Funds are being forced to sell. If it goes up buy puts.

2008 Sep 10 10:52 PM

[Alexander77:]

The slide in crop prices should a temporary event, pot is still a very solid investment

2008 Sep 14 01:00 PM