3 Critical Answers You Should Look for in PotashCorp's Upcoming Earnings Report

All eyes will be on PotashCorp (NYSE: POT  ) this week, as the fertilizer giant gears up to report its fourth-quarter and full-year numbers Thursday. PotashCorp's earnings will be the first major event after Russia's Uralkali's recent contract to supply potash to China at a substantial discount.

PotashCorp should have a lot to say about this development in its upcoming earnings call, which could give investors an idea about where the fertilizer market's headed to. That's vital information not just for PotashCorp investors, but also for those invested in peers Mosaic (NYSE: MOS  ) , CF Industries (NYSE: CF  ) , and Agrium (NYSE: AGU  ) .

Inside a PotashCorp facility. Source: Company website.

More importantly, PotashCorp will guide into its full-year 2014 this week, giving investors an idea about whether the shares are poised to bounce back after a disastrous 2013, or if this isn't the bottoming yet. Here are three critical questions you should seek answers to in PotashCorp's earnings report.

What to expect
Analysts expect PotashCorp's fourth-quarter earnings per share to slip 37% year over year on 17% lower revenue. That's not surprising, given the way nutrient prices have plummeted in recent months -- and it's not just potash I'm talking about. Phosphate, urea, and ammonia (the last two being nitrogen compounds) have also slumped over the past few months.

While robust demand from Latin America should boost sales volumes, low domestic sales and prices may cause an even bigger drop in PotashCorp's Q4 revenue. That could hurt its gross profit substantially, which, in turn, could eat into its bottom line. And if ongoing restructuring efforts cost the company higher than what it estimated, you may have to put up with worse numbers.

Will cost-cutting remain the strategy?
During its last earnings call, PotashCorp lowered its full-year potash gross profit guidance to $1.5-$1.7 billion, representing 15% decline from 2012 even at the higher end. The recent fall in potash prices could further pressurize the company's margins, so investors need to watch for the company's plans to tackle the challenge, some of which are already under way.

One of the most important developments in PotashCorp's fourth quarter was its announcement to layoff a sizable 18% of its workforce and suspend production at some mines. Through these initiatives, the company expects to cut $15 to $20 per tonne in potash cost in 2014. PotashCorp is also scaling down phosphate and nitrogen operations at a time when Mosaic is acquiring CF Industries' phosphate business for $1.2 billion, and CF Industries itself is pumping billions on new nitrogen plants. Potash nutrient seems to be losing favor with these companies, so PotashCorp may need to work harder to convince investors about business prospects in the longer run.

Investors can expect greater details about PotashCorp's restructuring efforts, and their impact on profits going forward, in its upcoming earnings call. Keep an eye on whether PotashCorp plans to cut costs further this year. Anything on the affirmative could signal tougher days ahead for the company.

Is a contract from India on its way?
Soon after Uralkali agreed to supply potash to China at $305 per metric tonne, Canoptex – the marketing group comprising PotashCorp, Mosaic, and Agrium -- signed a deal with China to supply 700,000 tonnes through the first half of the year. While the contract is good news, the quantity is 30% lower compared to the contract Canpotex bagged for the first half of 2013. With prices also substantially lower year over year, Canpotex members may see their revenue fall considerably in coming quarters.

A contract from India is badly need now. Look for updates in PotashCorp's upcoming call, because India usually follows China, so a contract may already be on its way. Any such indication by the company could send its shares higher.

Will PotashCorp's financials continue to look as good?
Despite the challenges, PotashCorp generated more than $1 billion in free cash flow for the nine months ended September 30. It continues to reward shareholders with great dividends, and it's also aggressively buying back shares.

If PotashCorp's margins remain stable, its dividend should remain safe. Share repurchases also indicate management's confidence in the business. So keep an eye on the company's margins and cash flow outlook for 2014. A good guidance should provide a safe cushion to investors in the form of solid dividend yields (which currently stands at 4.4%), even if business conditions remain weak.

Foolish takeaway
PotashCorp's move to scale back production comes at about the same time when demand for potash from international markets is showing signs of revival. That's good in a way, because if demand picks up, PotashCorp will have to operate its plants at greater capacity. That should lower per tonne production cost and help the company boost margins.

So make sure you don't miss PotashCorp's target operational capacity number for 2014 in its upcoming report, because that could be a key indicator as to the direction of potash demand, as well PotashCorp's margins. Stay tuned for updates and takeaways from PotashCorp's earnings report. 

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