Shares of PotashCorp (NYSE: POT ) hit a 52-week low today. Let's take a look at how the company got there to find out whether cloudy skies remain on the horizon.
How it got here
PotashCorp is part of a diverse group of fertilizer makers using several different types of fertilizer. These fertilizers are not all created equal in farmers' eyes, and that's been one driver of the diverse performances in the sector. Nitrogen-based fertilizer companies have taken off, but potash-based (and phosphate-based) fertilizers remain mired in a decades-long funk of flat to declining demand, as the Fool's Rising Star analyst Jim Mueller found earlier this year. The discovery sent him running toward PotashCorp competitor CF Industries (NYSE: CF ) , but any of the nitrogen-focused fertilizer companies (that have been around that long) would have outperformed PotashCorp over the past few years:
The shift in favor toward nitrogen-based fertilizer companies is just as striking if you include more recently public ones like CVR Partners (NYSE: UAN ) and Rentech Nitrogen Partners (NYSE: RNF ) . While CF's stock has slid somewhat in the period since Rentech's IPO, it remains in much better shape than PotashCorp:
What you need to know
Looking at a few basic stats on these industry players should tell us a little bit about why they've done as they have, but not as much as I'd like. Let's start with those basics:
3-Year Annualized Earnings Growth
Net Margin (TTM)
|Rentech Nitrogen Partners||18.4||N/A||21.2%|
|Terra Nitrogen (NYSE: TNH )||12.8||26.5%||36.5%|
Source: Yahoo! Finance. TTM = trailing 12 months. N/A = not applicable.
From the looks of it, these companies should be more or less moving in lockstep. They all look quite strong. But why are investors afraid of potash while they're racing toward nitrogen fertilizers? This is the most important chart of the bunch:
Material costs are everything. These are the main components of fertilizer. Potash is up 160% over the last five years, accounting for a rise in income even though orders may be flat. But most nitrogen fertilizer companies use natural gas for their raw material. Urea is just one bit of the nitrogen spectrum, but bear with me. It now costs two-thirds less to buy natural gas than it used to. That is, a dollar now buys you about three times as much gas. Based on urea prices, we can extrapolate and say that an amount of nitrogen fertilizer earns two-thirds more while only costing a third what it once did for materials. That's a better total improvement by far than potash. If only every business could see margin expansion like that.
Combine that great profitability with increasing demand and top it off with some of the highest dividend payouts in the entire market, and you can see why investors might be indifferent to PotashCorp and its comparatively uninspiring 1.4% yield. CF is the majority owner of Terra Nitrogen, and Rentech and CVR both have gas-producing corporate parents. They're cash cows, built to spin off as much profit as possible, and blessed with big brothers who ensure that profits stay high. PotashCorp is a big player in its own right, but it looks stodgy next to Terra's 7.8% yield, CVR's 9.7%, and Rentech's absurd 18.2%.
None of this necessarily justifies PotashCorp's slide, nor does it come with the expectation that PotashCorp won't grow in the future. It just goes a little way toward explaining why, in an industry full of high margins and solid growth numbers, the market expects less out of PotashCorp than out of many of its peers. PotashCorp does deal in phosphates and nitrogen fertilizers -- each nutrient contributes 27% to the company's revenue. But the market seems to be discounting that contribution, and ignoring the potash cartel's possible resurgence after a short period of sales weakness and production stoppages.
Where does PotashCorp go from here? That will depend on market sentiment, demand for its signature supply, and broad agricultural strength. There's little to threaten the company's profitability on the horizon, and The Motley Fool's CAPS community agrees, granting PotashCorp a rare five-star rating, with a near-unanimous 97% of members who've rated the stock expecting it to rise again.
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