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Is Potash Sowing Seeds of Discontent?

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Typically, when companies forecast lower sales or profits, their stocks usually take a hit. It's not always easy to tell whether it's having a fire sale, or burning down. Maybe it is time to get out -- or maybe it's time to buy more!

Fertilizer giant Potash Corp (NYSE: POT  ) recently said that its full year earnings were going to come in at the low end of the range of its previously issued guidance of $2.80 to $3.20 per share, as delays in supply contracts to emerging markets in China and India reduced sales. The stock pulled back on the news, as it marks the second time in three months that it cut guidance. But don't blindly follow those selling (or buying); you still need to do some research. We need to use the announcement as a jumping off point for additional research.

Potash Corp snapshot



Market Cap

$35.5 billion

Revenues (TTM)

$8.3 billion

1-Year Stock Return


Return on Investment


Estimated 5-Year EPS Growth


Dividend and Yield


Recent Price


CAPS Rating



Sowing the seeds of doubt
Record prices for potash in late 2008 and 2009 that hit around $900 a ton had analysts forecasting they could continue their parabolic run, and top out north of $1,500 a ton by 2020While that's always a possibility, prices have fallen back sharply, and are currently near $500 per ton. Of course, potash cost less than $200 per ton before it began its meteoric rise during the recession.

Nowadays, though, supplies are plentiful, and Potash will have to cut production again to meet the current state of slack demand. It recently idled its biggest mine for a month and, while it just reopened it last week, it's widely expected that Mosaic (NYSE: MOS  ) will be forced to cut output, too, as North American inventories remain 39% above the five-year average.

Potash, Mosaic, and Agrium (NYSE: AGU  ) have been cutting production all year long to try to catch up to falling demand. The prices that were set last didn't anticipate that lack of growth that's being experienced this time around. In India, for example, producers didn't expect the currency weakness that raised spot prices further for farmers, nor the subsidy cuts that hit them hard. India's largest potash producer says its sales have been halved as a result.

Reaping the whirlwind
As troubling as the indications are for the immediate future, the long-term outlook remains as strong as ever.

It's no less true because it's often cited, but the fact that people have to eat is a tremendous catalyst. Corn production in the U.S. is forecast to hit 10.7 billion bushels as of Oct. 1, down slightly from September, and off 13% from last year. Yields are forecast at 122 bushels per acre, much lower than the year ago figure. With lower crop forecasts and corresponding higher prices -- corn currently trades at $7.60 a bushel, well ahead of the $6.25 it realized last year -- farmers are expected to try and maximize harvests.

Fertilizer stocks from nitrogen producers, like CF Industries (NYSE: CF  ) and Terra Nitrogen (NYSE: TNH  ) , to the potash and phosphate producers, like Potash Corp, are going to benefit from the trends. The global need for fertilizer will ultimately outweigh whatever the local conditions are. Yes, China and India are huge consumers of potash, as is North America, but Brazil is also a major user, as well. (It's the third largest market.)

Lying fallow for a time
To me, while I see share price weakness representing opportunity, I'd still like to see Potash's stock pull back more. While it's size and scope should give it the valuation premium it commands over Mosaic and Agrium, with its enterprise value trading at 34 times its free cash flow, it's not quite cheap enough for me. Even Mosaic, at 26 times FCF, is rich. I like Agrium the best, as its enterprise value is just 12 times its free cash flow.

I'll pass on rating Potash on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings from one to five stars. Instead, I'll be rating Agrium to outperform the market indexes based on its valuation; but tell me in the comments box below if you think Potash Corp will be able to seed enough demand going forward to drive profits higher.

Looking under rocks

Potash does at least pay you a nice dividend while you wait for the growth thesis to work out. If you're interested in more of these types of dividend-paying stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here to discover the winners we've picked.


Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 19, 2012, at 11:49 PM, shlchan wrote:

    The second sentence under Lying fallow for a time - While it's size.... It should be While its size ...

    Please know the difference between it's and its.

  • Report this Comment On October 20, 2012, at 9:32 AM, havvey wrote:

    Agree hold off for a market pull back.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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