The potash industry was shocked earlier this year when Russia's Uralkali disrupted one of the world's largest potash partnerships by ending its joint venture. Analysts quickly speculated that this would cause global potash production to jump and consequently send prices lower, which is exactly what has happened.
As a result, major potash producer Potash Corp. (POT +0.00%) saw business conditions suffer throughout the first nine months of the year. At the same time, management maintains an optimistic outlook about the company's future, due to the positive underlying fundamentals of the potash industry that largely remain intact. This is why, when combined with a strong dividend yield and cheap valuation, shares of Potash Corp. look like a bargain.
Weathering the storm
Potash Corp. realized significantly lower prices for its potash, nitrogen, and phosphate products in the third quarter. That being said, Potash Corp. saw total revenue and diluted earnings per share fall just 8% and 6%, respectively, over the first nine months of 2013. These are definitely manageable declines, and management remains confident in the company.
This is because of strong fundamental demand for fertilizer across many of Potash Corp's key markets. North America is stable, while demand for fertilizer in Brazil, including potash, is expected to reach a record level this year. China should also provide a boost to future potash demand, due to the nation's decision to improve agricultural yields.
Smaller industry players feeling the heat
Potash Corp. is the industry leader, as it holds a market capitalization more than twice the combined market caps of Agrium (NYSE: AGU) and Intrepid Potash (IPI 1.26%). As a result, it's natural to expect Potash Corp. to struggle when its overall industry faces significant headwinds. At the same time, the smaller competitors are under intense pressure as well, and their results prove they aren't immune to industry woes.
Agrium held up well in both the third quarter and over the first three quarters of the year. Sales are down just 1% through the first nine months, and EPS dropped a manageable 10% in the same period. Management attributes Agrium's relative success to strong performance in North America. Agrium President and CEO Mike Wilson stated, "Agrium's retail business had one of its strongest third quarters on record, driven largely by high usage of corn protection products and related application services in our North American market."
Meanwhile, Intrepid Potash's production fell 12% in the quarter, but to the company's credit, is flat through the first nine months of the year. Intrepid Potash realized an average sales price of $363 per ton in the third quarter, down 10% from the previous quarter. In all, the combination of lower production and sales resulted in EPS dropping 62% through the first nine months of the year.
Potash shareholders paid well for patience
It's important to note that Potash Corp has maintained its dividend while the company weathers the storm. Along with its earnings report, Potash Corp declared its dividend and kept it unchanged from the previous quarterly payout. This is an important vote of confidence in the company's future, and investors get a hefty 4.3% yield for their patience. Consider that the S&P 500 Index yields roughly 2%.
Potash Corp's big dividend makes the stock favorable in comparison to not just the broader market, but to its competitors as well. Agrium investors get a solid 3.3% yield, but Potash Corp still comes out ahead on the dividend front. For its part, Intrepid Potash does not pay a dividend to shareholders.
Why better days are ahead for Potash
While it's reasonable to focus on Potash Corp's rough quarter as a reason to avoid the stock, its worth not getting carried away by one quarter's worth of information. Even though Potash Corp undeniably struggled in the third quarter, the company's nine-month cash flow from operating activities was the second-highest in its history.
Moreover, if investors take a long-term view, there are signs that the storms hovering above the global potash industry will pass. Potash Corp expects to earn $2.10 per share, at the midpoint of its full-year 2013 guidance. At a recent price of $32 per share, investors are paying just 15 times this year's earnings.
Potash Corp's earnings are likely to recover over the next few years, and if so, the stock's valuation will as well. When combined with a very high dividend, new investors appear to be getting Potash Corp. at a bargain price.
