The Boring Portfolio

Boring Portfolio Report
Thursday, February 8, 1996

There was no news today about the three stocks currently residing in the Borefolio, and the movement (or lack thereof) in the stocks requires correspondingly little in the way of commentary.

So rather than bore you with a rambling account of the daily meanderings of KLIC, TXI, and GNT, I thought I'd bore you with something else--namely, a report on the fourth stock to enter the Halls of Boredom: Potash of Saskatchewan (POT).

I figured we needed to green up the portfolio a bit, and what better way to do so than to sprinkle some fertilizer on it? Get all the poop on POT in its new folder in the Boring Portfolio list.

Oh, yes: Green Tree grew 3/8 today on the bid side; Texas Industries added another half-point; and Kulicke & Soffa shares moved up overall, but the bid price (which we use here to calculate Foolishly) slid a quarter-point. That's about it!

***PLEASE NOTE*** This purchase will be in The Boring Portfolio, NOT in the Fool Portfolio. The Boring Portfolio is run by MF Boring (Greg Markus), not Tom and David Gardner. We've had some confusion on this point in the past, and just want to make sure this point is clear. For more information on the Boring Approach, click EXTRA INFO on The Boring Portfolio in the Hall of Portfolios listbox. Now, without further ado, the buy report:

Potash Corporation of Saskatchewan (NYSE:POT)
122 First Avenue S., Saskatoon, Saskatchewan  S7K 7G3  Canada
Phone: 306-933-8521

Approx. Current Price: 76
Trade: Buying 100 shares, February 9, 1996

THE COMPANY

Potash of Saskatchewan is one of the world's largest integrated fertilizer companies. It is the world's leading potash producer, responsible for 14% of annual global production and controlling 22% of global production capacity. Virtually all of this potassium product is used in fertilizer, although it has other industrial and agricultural applications, as well.

The company entered the phosphate fertilizer business in a big way last year, as well, by purchasing Occidental Petroleum's operations in Florida for $286 million (less than the value of one year's sales) and Texasgulf from Elf Aquitane (for $819 million). It funded those acquisitions through equal parts of debt and equity, so that long-term debt has remained of manageable proportions (around 43% of total capitalization). Overnight, Potash became owner of 7% of the world's phosphate capacity. Indeed, phosphate rather than potash should account for the majority of revenues this year.

The company has received a fair amount of press recently as investors have speculated about ways of capitalizing upon population and economic trends in the developing areas of the world, such as China and India. In China, for example, rapid economic growth has spurred demands for a better and more diversified diet, including more meat (which means more feed for cattle). Presently average grain yields in China run about 50% behind those of the U.S. One obvious way to boost yields: more fertilizer.

In the U.S., farmers will likely be planting fence post to fence post this year. Federal farm programs that support prices by idling cropland are being scaled back considerably. And with global food reserves at unusually low levels, the demand for U.S. food exports should be high. American agricultural exports are expected to jump to a record $58 billion this year, according to a story in the Feb. 12 issue of Business Week.

Analysts in recent issues of Barron's have picked POT as one of their top selections for 1996. Earlier this week, POT was featured in a Wall Street Journal feature story, as well. In that article, Barbara Rosenblum, chief investment officer of the San Francisco firm bearing her name, said she likes POT because the company "has tremendous cash flow, is paying down debt and has the ability to raise prices because it controls supply."

My own judgment is that the argument for Potash's growth over the coming year is persuasive, even if Business Week, the Wall Street Journal, Investors Business Daily, and most everyone else thinks so.

Final sales and earnings numbers for FY1995 will be reported on February 14. Sales are expected to come in right around the $1 billion mark ($US), and some forecasts are for revenues in 1996 to approach $2 billion.

Altogether, some 257 institutions own chunks of POT, comprising approximately 49% of outstanding shares. Insiders and officers hold a relatively small amount of shares (less than 1%).

THE STOCK

POT shares have doubled in value over the past 12 months. With all the attention devoted to the stock (which is followed by 15 analysts), is there any chance of finding good value here? I think so.

Earnings for POT were $2.18 per share in 1994. Latest estimates are for the company to earn $3.70 per share in the year just ended, and for EPS to jump to $5.67 for 1996. That translates into annualized growth of 61%. (Both the 1995 and 1996 consensus estimates have been revised upwards in the past month--by a penny for FY95 and by 9 cents for FY96.)

Of course, stocks of fertilizer companies don't get multiples of 61 assigned to them. Estimates of long term growth run a lot closer to the ground--although how close is a matter of some disagreement. Over the past few years, POT's multiple has been in the mid-teens. Applying a p/e of 15 to my rolling EPS estimate of $5.09 (for the four quarters beginning with 3Q:95), and tacking on $1.04 in dividends yields a current fair price of 77 3/8, or basically spot-on where POT is today. Maybe there's something to this efficient market theory after all?

Key Numbers

Stock Price :            29.00   ROE :                25.2
52 Week High :           79.00   Price/Earnings :     13.7
52 Week Low :            34.75   Price/Sales :         6.0
Beta :                     .59   Price/Book :          3.1
Yield :                    1.3   Debt/Capit. :        43.0
Shares (mil.):            45.1    
Market Cap ($Mil) :     3427.6
Average Daily Vol:     308,500   
Net Profit Margin (%)     20.9

                          1994     1993
Cash Flow Per Share       2.73    -1.34
Capital Expenditures     17.16   138.41

According to First Call, 15 analysts collectively rate POT at 2.3 (basically a "buy"). S&P awards POT a four-star rating. Value Line ranks the stock as "3" for Timeliness and "3" for Safety--i.e., about average. Recent Investors Business Daily rankings for POT are 82 for EPS and 74 for relative strength.

CONCLUSION

So POT is fairly priced. Fine, but aren't we looking for bargains? Absolutely. But bargains on stocks with superior earnings prospects are tough to find in a market that continues to hit record highs pretty much on a daily basis. POT is a fairly priced stock with earnings underpinnings that are projected to grow over 50% in the coming year (from $3.70 to $5.67). I'm quite satisfied to place some money on a fairly-priced 50% grower.

Moreover, POT helps diversify our portfolio, provides a stock in a sector that is relatively recession-resistant (just in case), and brings down the overall risk profile a tad with its sub-1.0 beta.

--Greg Markus (MF Boring)

Today's Moves

GNT   +   3/8
KLIC  -   1/4
TXI   +   1/2