Fertilizer companies are not sexy businesses. They don't have asset-light models that generate great profits, nor do they sport great growth rates.
Fertilizer companies do, however, produce plant nutrients that allow farmers to grow enough crops to feed the world. As long as people need food (which of course will be forever), the world will need fertilizer companies. With global population set to grow another 2.4 billion by 2050, robust future demand looks certain for the boring fertilizer companies.
The opportunity
As arguably the leading fertilizer company on Earth, PotashCorp (POT) occupies an enviable position. The Canadian company mines three basic fertilizer nutrients, potash, phosphate, and nitrogen, but is known more for being the low-cost producer of its namesake nutrient, which contributes nearly half of PotashCorp's total gross profit.
Potash is a highly concentrated, high-margin sector with significant barriers to entry. It takes companies billions of dollars in capital expenditures and several years of lead time to bring a potash mine online. Because of potash's barriers to entry and long-term promise, Anglo-Australian materials giant BHP Billiton (BHP -3.43%) tried to buy PotashCorp in 2010.
Over the past three years, PotashCorp's share price has underperformed due to a confluence of factors. One was lower than expected potash demand from China, which is trying to increase its own domestic production. Another was the reduction of potash subsidies for Indian farmers in 2011. Perhaps the most important factor of all was the 2013 breakup of the Uralkali and Belaruskali price-fixing cartel, which led to more potash coming onto the market.
While PotashCorp's stock has performed poorly since 2011, the future looks brighter. After falling for three years, potash prices have stabilized at about $300 per metric ton. PotashCorp's potash segment cost should trend lower as two low-cost mines come online by 2016. Analysts estimate that the two new mines may increase the company's potash segment profitability by as much as 25%.
PotashCorp shares may also benefit from management's firm commitment to return capital to shareholders. As new mines come online and the company spends less on capital expenditures, PotashCorp should have more free cash flow to increase its dividend or do more share buybacks.
All of this makes PotashCorp a low-risk opportunity over the long term.
So is it time to buy PotashCorp?
Bottom line
Generally the best time to buy materials companies is during industry oversupply when there is proverbial blood on the streets and a catalyst is likely to send material prices higher. So far, that catalyst -- such as the Uralkali and Belaruskali price-fixing cartel reuniting -- has not occurred.
But for long-term investors who don't care as much about timing, it makes sense to buy low-cost producers with solid cash flow and fat dividends when they're on sale.
PotashCorp has a great business that BHP Billiton wanted to buy in 2010. While the Canadian government rejected the buyout, it won't stop the average investor from buying shares of the company at a considerable discount today.
