There's been a great deal of fear gripping potash fertilizer stocks in recent weeks, including Potash Corp. of Saskatchewan (NYSE: POT ) , Mosaic (NYSE: MOS ) , and Intrepid Potash (NYSE: IPI ) . Panic ensued when it was revealed earlier this year that a global potash partnership had broken up, which caused potash prices to fall, and brought stock prices of these three down in tandem.
In times like this, it's understandable to take a cautious view on the industry. The broken partnership likely means a flood of supply will hit the fertilizer market. Lower potash prices will undoubtedly affect Potash Corp., Mosaic, and Intrepid Potash, which explains their precipitous drops in price this year. At the same time, the market often sells first and asks questions later. Was this a classic case of market overreaction? Or, should investors get out while there's still time?
Major trouble in the global potash market
Problems initially surfaced when Russia's Uralkali disrupted one of the world's largest potash partnerships by ending its joint venture with its partner in Belarus. This caught the market completely off guard, and publicly traded potash stocks dropped significantly in a relatively short time.
In the immediate aftermath, analysts unsurprisingly added fuel to the fire with a flurry of sector downgrades, warning investors of the potential material harm to potash producers. Potash price expectations were slashed, with Goldman Sachs analysts providing dour expectations for this year and next. Goldman revised its expectations for potash prices downward to $300 per ton, a marked difference from their previous expectations, which called for potash fertilizer to sell for $486 per ton in the back half of 2013 and $520 per ton next year.
Fears of lower potash prices are already being realized. Wholesale potash prices recently touched lows not seen since 2010, meaning investors may be understandably wary of what the future holds for Potash Corp., Mosaic, and Intrepid Potash.
This too shall pass
Despite the broader, over-arching concerns regarding the Uralkali breakup, I still see a lot to like from global potash producers. The long-term industry prospects are still quite positive, which Mosaic President and CEO Jim Prokopanko recently reiterated when his company issued a revised third-quarter guidance.
As he stated, "the long-term positive crop outlook for crop nutrient demand has not changed; high commodity prices are driving record farm returns and making our products more affordable than ever before. These strong fundamentals are expected to drive near record global phosphate and potash shipments in calendar 2013". In fairness, he did also acknowledge likely near-term pressure on results, but this is still an important dose of confidence for investors.
Specifically, I believe Potash Corp. to be the most attractive of the three. The company's management demonstrated its confidence by maintaining the company's $2 billion share buyback. Its hefty 4.4% dividend yield is double the yield that competitor Mosaic offers. Moreover, Potash Corp. increased its dividend by 25% earlier this year, and while future dividend growth probably won't be as impressive, it's clear that Potash Corp. is committed to its capital allocation program. Investors are being paid very well to wait for the dust to settle, and the share buyback only serves as an additional layer of downside protection.
It's for these reasons that I'm inclined to view Intrepid Potash more cautiously: The company is the smallest of the three by far, and doesn't offer its investors the safety of a dividend payment. And, it's worth noting that Intrepid Potash was already struggling this year before the Uralkali partnership break-up. Its second-quarter earnings per share dropped 40%, while Potash Corp. saw 22% growth in second-quarter EPS.
It's extremely likely that the major potash producers will see business conditions suffer in the near term. The long-term fundamentals, however, look very much intact. Potash Corp. dominates in an industry with high barriers to entry, such as the fact that the high costs and ramp-up times of nutrients Potash Corp. focuses on make it extremely difficult for new competition to take hold. When combined with its huge dividend and share buyback, Potash Corp. looks to be a bargain at its current price.
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