Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is the Potash Industry Headed for Trouble?

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.

More dividend coverage from The Motley Fool

Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

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 14, 2013, at 2:21 PM, Gump1968 wrote:

    The article on Saturday says IPI is destined for greatness and this article says they are doomed...time to flip a coin.

  • Report this Comment On October 14, 2013, at 5:43 PM, rciura wrote:


    Thank you for your comment. First, let me state that different writers will often have different takes on a stock. That being said, my position is not that Intrepid Potash is doomed, but rather that I take a more cautious view of the company. I prefer Potash Corp., but that's not at all to say I think Intrepid Potash is 'doomed'. Thank you for reading, and best of luck to you.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2680564, ~/Articles/ArticleHandler.aspx, 10/1/2016 6:59:06 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 21 hours ago Sponsored by:
DOW 18,308.15 164.70 0.91%
S&P 500 2,168.27 17.14 0.80%
NASD 5,312.00 42.85 0.81%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/30/2016 4:02 PM
IPI $1.13 Up +0.03 +2.73%
Intrepid Potash CAPS Rating: ***
MOS $24.46 Up +0.21 +0.87%
Mosaic CAPS Rating: ****
POT $16.32 Up +0.10 +0.62%
PotashCorp CAPS Rating: ****