All eyes will be on PotashCorp (NYSE:POT) tomorrow when the fertilizer giant reports its first-quarter numbers and likely faces some tough questions from analysts. After all, the potash industry is still under a shroud of uncertainty, and rumors are swirling that PotashCorp may, once again, have to battle a takeover bid by BHP Billiton (NYSE:BHP). It isn't easy to survive such business conditions.
Worse yet, just when investors hoped to see fertilizer markets stabilize, Agrium (NYSE:AGU) dealt them a blow earlier this month by delivering a lukewarm guidance for its first quarter, blaming delayed spring planting in the U.S.
So if you're a PotashCorp investor, tomorrow could be a tough day. But before you act in panic, look for the following five key factors in the company's earnings report to decide which way the company is headed.
Is cost reduction working?
Analysts expect PotashCorp to turn a profit of $0.35 a share in its first quarter, which translates into a near-45% drop year over year. However, they project PotashCorp's revenue to fall 24%, suggesting how higher costs could be eating into the company's bottom line.
To deal with the situation, PotashCorp announced aggressive restructuring efforts during the fourth quarter, including massive layoffs and suspension of production at some mines. The company expects to slash its potash production costs by $15 to $20 per tonne this year. If its plans are on track, PotashCorp's first-quarter report should reflect some of those cost savings, helping to some extent to offset low price realizations.
Look for whether PotashCorp has any plans to reduce costs further this year. While that could help maintain margins, it could also indirectly mean that the worst isn't over yet for the potash industry, and the recovery could be lumpy.
How badly will India hurt the company?
India is about to elect a new government, but only time will tell whether that'll do any good for PotashCorp and its peers. Like it or not, India is an important market for potash companies, especially for members of the marketing group Canpotex, including PotashCorp, Mosaic, and Agrium.
The Indian government last month slashed subsidies on potash by nearly a fifth, which could hurt demand substantially. At the same time, potash prices are down nearly 25% from 2013, which could offset the effect of lower subsidies. But India's potash consumption has been lumpy over the years, so the net effect could go still against Canpotex members. Look for PotashCorp's views on the Indian market in its earnings call. If the company sounds cautious about the market tomorrow, anticipate lower revenue going forward.
Will PotashCorp continue to reward shareholders?
Despite a relatively challenging year, PotashCorp generated $3.2 billion in operating cash in 2013, at par with the previous year. A good portion of those cash flows go to shareholders via dividends and share buybacks.
PotashCorp increased its quarterly dividend by 25% in 2013, and I wouldn't be surprised if it raises it further this year, especially with capital expenditures shrinking. So don't miss PotashCorp's projections about its cash flow for 2014, and how it plans to use it. Higher dividends provide a safe cushion to investors, especially when business conditions remain weak. And it certainly helps that PotashCorp shares sport a handsome 4% dividend yield.
Is a stake sale on cards?
One question every analyst and investor will seek an answer to tomorrow is whether PotashCorp would fight a potential bid from BHP Billiton, or would perhaps sell a part of itself if there's an offer.
While BHP taking over PotashCorp completely may seem unlikely, the possibility of buying a small stake in the fertilizer giant cannot be ruled out. Even a bid by BHP could stir the potash market, particularly since it's already in such vulnerable position. PotashCorp may answer diplomatically if an analyst pops the question tomorrow, but every word from the company should be carefully weighed.
Will PotashCorp maintain its outlook?
As of now, PotashCorp expects to earn anything between $1.40 and $1.80 a share this year. That's roughly 12% downside from 2013 at the higher end. While PotashCorp may have already factored in the worst while guiding, investors will get the full picture tomorrow. If PotashCorp raises, or even reiterates its outlook, then the fertilizer market could have perhaps found a bottom, which would be a positive sign.
Overall, it was a rough quarter, and PotashCorp's numbers could disappoint. But what the future holds for the company should matter more to investors, so act accordingly.