Potash Corp (NYSE:POT), the world's largest producer of the fertilizer by market value, recently announced a change in its leadership. The long serving CEO and President, Bill Doyle, will step down from his position and will be replaced by an outsider, Jochen Tilk, on July 1, 2014. However, Doyle will remain with the company as a senior advisor till June 2015.
The move itself should not come as a surprise to markets as Bill Doyle is approaching 64 and has been with the company for more than 27 years. Moreover, he has been the CEO of the company since 1999. Many of these years have been Potash Corp's most successful years. The company's earnings and share performance have improved considerably under Doyle's leadership. Potash is not the only company in the industry to go through a leadership change recently. Agrium (NYSE:AGU) and CF Industries (NYSE:CF) also appointed new CEOs late last year. However, both these companies promoted CEOs from within.
Tilk brings mining experience
The appointment of the new CEO and President, Jochen Tilk, comes after a three-year internal and external selection process. Although Tilk has no potash industry experience, he is a veteran of the mining industry and had been with Inmet Mining, an operator of copper and zinc mines, for 24 years. Tilk served as the President and CEO of Inmet Mining between 2009 and April 2013, at which point the company was acquired by First Quantum Minerals in a hostile bid for ~$5 billion.
A lot has changed since the selection process begun
Three years ago it seemed likely that the company's significant brownfield investments would be bearing fruit and that it would enjoy a period of both substantial and sustainable earnings growth. However, a lot has changed since the break-up of Belarusian Potash Company (BPC) last year. The potash industry's operating environment is much more complex now, with a number of expansion projects being cancelled rather than started up. For example, Vale SA (NYSE:VALE), the world's third largest mining company, suspended its $6 billion potash project in Argentina last year. However, Potash Corp's capex plans are largely complete, and should create a natural pivot point for the new leadership to steer the company out of a challenging post-BPC world.
Timing is surprising, and an outsider as CEO?
While the change in leadership is not surprising, the timing is. Moreover, Potash Corp opting for an outsider to lead the company in a post-BPC world is also intriguing. Potash Corp.'s peers Agrium and CF Industries also underwent leadership change recently. However, both companies promoted CEOs from within. The leadership change comes after the company's main competitor Russia's Uralkali OAO, quit the Belarusian Potash Company trading partnership last year and said it would maximize sales volume. Potash prices have fallen sharply since the breakup of BPC.
Although the company has not commented on its policy going forward, it is likely that the new CEO will stick with the company's price-over-volume strategy. Doyle is the most recognizable figure in the global potash industry and his extended stay at the company signals that there will be no sudden change in company's stated policy, not in the near term at least.
YTD outperformer but valuation reflecting optimism
A general perception among investors that the low potash prices of late last year were truly a floor from which the market could only move up has had a positive impact on potash-levered stocks in 2014. Potash Corp. is up 3.3% YTD, while Mosaic (NYSE:MOS) and Agrium are up 2.7% and 2.5% respectively. Moreover, the S&P 500 is only up 0.6% over the same period.
Settlement of export contracts with India and China, a trend up for grain prices, expectations of a reformed BPC following a change in Uralkali's ownership, and as mentioned earlier a general perception that potash prices have bottomed out, have all provided support to potash-levered stocks. However, shares appear to have already accounted a rebound in potash prices/profitability. Potash Corp shares are trading at a premium compared to its peers. The company is trading at a price/earnings ratio of 16.6, higher than the industry average of 14.8. Mosaic and Agrium, in comparison, have price/earnings ratios of 10.9 and 12.7 respectively. Potash Corp has a forward price/earnings ratio of 15.0, compared to 9.4 for Agrium and 12.4 for Mosaic. Finally, Potash Corp. is trading at a price/book ratio of 3.0, compared to 2.0 for Agrium and 1.7 for Mosaic.
The leadership change on its own is not a big positive for Potash Corp. However, the potash market has gone through a number of changes in the past 12 months, and there may be some incremental optimism from investors in anticipation of potential new management approaches in the post-BPC potash industry. However, Bill Doyle has been the face of Potash Corp for a long time and has been a strong advocate of price-over-volume strategy. Investors will be closely watching if Tilk has a different strategy. In any case, I think the new leadership may bring a strong operational background, but the key issue of pricing power in an over-supplied market is likely to remain in the forefront for months to come.