Being the world's largest fertilizer maker certainly has its advantages. PotashCorp (NYSE: POT ) , which holds the envious position, looks poised to have a great year ahead. But does this mean the company is totally free from weaknesses? No company is perfect, and only a detailed scrutiny can give us a clear picture. Let's take a look at where PotashCorp stands.
- Industry king: PotashCorp is the world's biggest potash maker by capacity, and owns the highest stake in Canpotex -- the three-member legal cartel that controls all potash exports out of Saskatchewan.
- Solid business line: Apart from potash, the company also deals in phosphate and nitrogen. Together, the three are considered the most important fertilizers used by farmers.
- Sourcing raw material: High prices for raw materials like phosphate rock continue to be a pain for most fertilizer makers, but not for PotashCorp, as it mines 94% of its rock requirements. The permits the company holds will allow it to mine some critical areas for more than 30 years.
- Impressive financial position and shareholder value: For a total-debt-to-equity ratio of 57.8%, PotashCorp's interest coverage stands at a high of 25.9 times. The company's operating profits have grown at a mind-blowing average annual rate of 77.2% in the past two years. It also offers an excellent return on equity of 42.4%.
- Critical litigation favors Mosaic: Under an agreement, Mosaic (NYSE: MOS ) has been supplying 1.1 million tonnes of potash at cost to PotashCorp every year for the past four decades. After a litigation settlement, this agreement will expire at the end of 2012, leaving PotashCorp with less potash to sell till the expansion at its Cory mine gets finished by next year.
- Foreign exchange risk: Since PotashCorp's operations are largely based in Canada, it stands vulnerable to exchange-rate fluctuations. For instance, the strengthening of the Canadian dollar against the U.S. dollar adds to PotashCorp's costs and lowers margins.
- Great foresight: PotashCorp is in a very good position to take advantage of rising potash demand and prices as five out of nine expansion projects it initiated years back (in anticipation of rising demand) were completed last year. The company's operational capacity is likely to increase by more than 50% in three years.
- Emerging economies to fuel growth: Countries like India and China are growing rapidly, and their need to grow more to feed the burgeoning population should keep PotashCorp busy. Canpotex recently bagged a contract from China's biggest integrated agriculture company, Sinofert.
- India's caution, Canpotex's tension: India, which is a big market for potash, hasn't yet placed an order with Canpotex this year. The nation's delay in purchases because of high inventories and regulations pertaining to subsidies could mean lower revenue for Canpotex (read: PotashCorp).
- Price volatility: Crop prices affect demand for nutrients. So, PotashCorp's performance depends a lot on crop prices, which are very volatile in nature.
- Fierce competition: With other potash players like Mosaic and Agrium (NYSE: AGU ) also expanding in a big way, PotashCorp has to consistently find ways to maintain its leadership position. Also, PotashCorp is less focused on nitrogen, which is a key nutrient for corn, than companies like CF Industries (NYSE: CF ) are. CF might gain more from high corn plantations than PotashCorp.
The Foolish bottom line
The pros seem to outweigh the cons in PotashCorp's case. It shouldn't be difficult for the fundamentally strong company to tide over macro challenges.
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