Why PotashCorp Is a Buy Now
The last time I wrote about PotashCorp (NYS: POT) , a number of factors led me to believe that the first quarter was not going to be its best. I was right. The chemical biggie's first quarter was a bummer. Surprisingly, though, the company is expecting its second-quarter earnings to be close to or at a record high.
Is it just the forecast that's compelling? Nope! Some recent industry developments tell me things could turn around for the company soon.
Sad quarter. Now what?
Cautious buyer behavior continued to hit PotashCorp's sales. Volumes in its largest segment, potash, slumped by more than 50% compared to the same period last year, with shipments falling sharply by 50%. This shouldn't have come as a surprise though. Anticipating softer demand, most chemical makers had resorted to production cuts lately. Peer Mosaic (NYS: MOS) announced potash production curtailment of up to 20% for the first half of this year. In February, PotashCorp curtailed production at some of its plants at Saskatchewan during the first quarter. Understandably, potash sales took a hit.
But things might soon take a turn for the better for two reasons.
- The company is not about one nutrient alone.
- The potash market has been showing signs of a rebound for the past couple months.
More than half of PotashCorp's revenue is derived from phosphate and nitrogen. The phosphate division's sales were up 13% while nitrogen sales remained flat during the first quarter.
The point I'm trying to make is that the stable performance of these nutrients helped offset weak potash sales to a certain extent. The nitrogen division in particular is boosting PotashCorp's gross margins because of the sharp dip in natural gas (the primary input) prices. Nitrogen king CF Industries (NYS: CF) had a heck of a fourth quarter primarily because of this. As long as natural gas prices remain subdued, and corn plantations rise (see below), nitrogen sales should keep benefiting PotashCorp.
The three big triggers
- Unusually warm weather has encouraged farmers to take to the fields earlier than usual, and essential crops such as corn are being planted at a pace not seen in two decades. At the same time, corn stockpiles touched an eight-year low in March. Since corn requires a lot of nutrients, it could mean big money for companies such as PotashCorp, especially if the U.S. Department of Agriculture's prediction of record U.S. corn plantations this year turns out to be true.
- Mosaic CEO Jim Prokopanko recently told Reuters that in a single day, the company sold the same amount of potash it had sold in the whole of January! This is indicative of a pickup in the demand for the nutrient.
- Canpotex, the three-member legal cartel comprising PotashCorp, Mosaic, and Agrium (NYS: AGU) that controls all potash exports out of Saskatchewan finally bagged a contract from China last month. Coming after a hiatus, this was great news for the industry. As the largest stakeholder in Canpotex, PotashCorp stands to gain the most from it.
The situation truly points at the possibility of much better sales for PotashCorp in the second quarter. I have anyway remained bullish on the long-term prospects of the fertilizer industry.
That these companies see great potential for the future is clear from the expansions they are undertaking. PotashCorp is likely to complete most of its mine expansion projects this year. A good part of Agrium's capacity expansion at a Saskatchewan mine is expected to be completed by next year. Mosaic's 5 million tonne potash expansion program is also on schedule.
And the story gets even more interesting when the world's biggest mining company starts taking extra interest in nutrients. After an unsuccessful takeover bid for PotashCorp in 2010, BHP Billiton (NYS: BHP) is now planning to build the world's largest potash mine -- the finalization of which is likely to make headlines sometime this year.
The Foolish bottom line
PotashCorp's shares have shed nearly 9% in the past month amid concerns surrounding potash, and the stock is inching closer to its 52-week low. On the valuation front, its trailing P/E of 15.7 looks pretty much in line with that of peer Mosaic (13.5). But, what's worth noting is how its forward P/E drops off to 11.1, indicating possible growth in earnings in the future.
The company is projecting record industry shipments this year, and hopes to churn out a great second quarter. Looking at the current industry conditions, these might just come true. I suggest you keep a tab on PotashCorp by adding it to your stock watchlist. Click here to add it.
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At the time this article was published
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