It's been a rough ride for PotashCorp (NYSE:POT) investors. Just as the stock was inching toward its 52-week high, a couple of analyst downgrades earlier this month cut short its rally -- the stock has lost more than 6% over just the past month. If weak nutrient markets have triggered near-term worries, Rio Tinto (NYSE:RIO) and BHP Billiton's (NYSE:BHP) decisions to move forward with their respective multi-billion potash projects have raised concerns about PotashCorp's long-term prospects.
The question in every investor's mind right now is: Will industry headwinds compel PotashCorp to lower its guidance this Thursday when it reports its second-quarter earnings? And could that send its shares plummeting?
Should you really panic?
Analysts expect PotashCorp to report 38% lower year-over-year earnings per share in Q2, driven by 16% lower revenue. That isn't surprising, given the persistent weakness in potash markets. But demand from Latin America, especially for premium-priced granular potash, has been strong in the past quarter, and that may help PotashCorp trump estimates.
The real concern, however, is what lies ahead for PotashCorp. As I mentioned, recent analyst downgrades have left PotashCorp investors in the lurch. While JP Morgan and Raymond James downgraded the stock primarily on valuation concerns, TD Securities is concerned about falling crop prices. Lower crop prices will mean lower income for farmers, and weak demand for fertilizers.
Just days earlier, corn prices hit their four-year lows after the U.S. Department of Agriculture projected a near-bumper corn crop this year in its July report. That bodes ill for fertilizer makers like PotashCorp, as they desperately need to sell more to get back on the growth track after a horrendous 2013.
Given the backdrop, it remains to be seen whether PotashCorp will stick to its full-year outlook when it reports numbers this week. Interestingly, improving demand and prices encouraged the company to raise the lower end of its full-year earnings per share guidance by $0.10 to $1.50-$1.80 in the first quarter. Moreover, PotashCorp projected 4%-7% improvement in full-year potash shipments versus 2013 in its latest quarterly market analysis report.
What's more, PotashCorp even called off some of its previously announced layoffs last month, citing tight market conditions for high-margin granular potash. Perhaps investors shouldn't read much into TD Securities' downgrade -- chances are PotashCorp may have already factored in the worst in its previously announced guidance.
Don't take your eyes off this market
Investors should keep an eye on what PotashCorp has to say about India in its upcoming earnings call. Dwindling potash demand from the nation was one of the major factors that pushed PotashCorp's profits down in the past couple of years.
In a positive development, India's newly formed government recently acknowledged the need to address the issue of imbalanced application of nutrients (one that largely favors urea over potash). Any policies toward fixing that problem will likely favor potash.
At the same time, India has slashed subsidies on potash again, which could discourage farmers further from using the nutrient. It's a catch 22, and PotashCorp will perhaps provide the market a clearer picture of what to expect in its upcoming call.
Since India's stand on potash will have long-term implications on PotashCorp's sales and profitability, make sure you don't miss those critical updates this week.
This could help if demand falls
With industry conditions giving out mixed signals, much of what PotashCorp earns this year will depend on its restructuring efforts. PotashCorp aims to reduce its potash cost by $15 to $20 per ton this year. If achieved, this should help the company maintain its potash gross margin at "historically high levels" even in a challenging year.
That should also make it easier for the company to push its margins higher once the nutrient markets recover. Look for updates about whether PotashCorp is on track to achieve those cost-reduction targets in its upcoming earnings call.
What should you do if PotashCorp fails to deliver?
I see slim chances of PotashCorp lowering its outlook this week. But even if it does, I'd urge investors not to panic. Instead, they should focus on the company's long-run visibility, since what applies today may not apply tomorrow in an industry that depends on highly volatile factors like crop prices and weather. And if PotashCorp talks about boosting shareholder payouts in its upcoming call, you may even consider any drop in its stock price on weak numbers an opportunity.