Will PotashCorp Earnings Finally Perk Up?

Image: PotashCorp.

The fertilizer industry is one of the most important in the world, with billions of people relying on yield-enhancing techniques to provide the food they need to survive. Fertilizer giant Potash Corp. of Saskatchewan (POT) has benefited greatly throughout its history from serving this need, with its vast supplies of potash offering farmers vital nutrients to help them make the most of their land. Yet commodity prices for farm products have been weak for a while now, and coming into its third-quarter earnings report on Wednesday, PotashCorp investors want to know whether the company will be able to change gears successfully from its proposed acquisition strategy to keep working at growing its fundamental business. Let's look more closely at PotashCorp to see what investors should look for both this quarter and in the months and years to come.

Stats on PotashCorp

Source: Yahoo! Finance.

Can PotashCorp earnings bounce back?
Investors have gotten even more nervous about the prospects for PotashCorp earnings in recent months, reducing their third-quarter projections by nearly 15% and cutting almost as much from their full-year 2016 estimates. The stock has continued to collapse, falling another 22% since late July.

PotashCorp's second-quarter results showed just how strong the headwinds holding the fertilizer company back have been lately. Revenue fell more than 8%, and net income dropped at an even more alarming rate of 12%. The company did manage to see some gains in realized potash prices as increased demand for offshore shipments seemed to help put a bottom under the market. Yet substantial declines in pricing on nitrogen-based fertilizer hurt PotashCorp. The phosphate segment behaved fairly well, as PotashCorp joined rival Mosaic (MOS 1.74%) in posting solid results from higher pricing. Yet because PotashCorp doesn't have as much phosphate exposure as Mosaic, Mosaic obviously got more of a boost from that segment's success than PotashCorp did, and PotashCorp's downward revision took some of the air out of shareholders' views of the stock.

An even bigger potential setback came from PotashCorp's failure to get a deal done to buy German potash producer K+S. The Canadian company had offered $8.7 billion for K+S, which the German counterpart argued was less than its true value, and K+S also had concerns about possible strategic moves after the combination, such as imposing layoffs among its European workforce or selling off key components like its Morton's salt business. Even after PotashCorp tried to address those concerns by adding new conditions to the deal, negotiations fell apart, leaving the Canadian potash giant to go it alone.

At some level, though, PotashCorp might well have benefited from the K+S deal not going through. Certainly, PotashCorp could have benefited from K+S holdings in southern Saskatchewan as well as the geographic diversification that the German company's other assets would have given it. The problem, though, is that with conditions in the potash industry being so tough right now, engaging in a bidding war with itself to try to entice K+S management to agree to a deal could easily have been the wrong move at exactly the wrong time. PotashCorp shareholders actually bid shares higher once the company said the deal wouldn't happen, apparently reflecting fears among investors that the fertilizer giant would go too far in its takeover efforts.

In the PotashCorp financial report, be sure to look for comments on what the company expects to do to follow through on its promise to find other ways to expand organically in seeking overall growth. Even though few market participants see a short-term shift in the agricultural commodities market that in turn could help fertilizer demand, PotashCorp has remained confident that it can outperform Mosaic and its other competitors in producing fertilizer as efficiently as possible. If the company can make good on its potential, PotashCorp's current rock-bottom share price could offer considerable upside in the long run.