PotashCorp Climbs on Record Offshore Shipments Despite Earnings Headwinds

Image: PotashCorp

With a soaring global population, the demand for food has never been greater. That's good news for fertilizer companies like PotashCorp (POT), which serves a considerable portion of the world's needs for potash and other key crop-yield-enhancing products. Coming into Thursday morning's second-quarter financial report, PotashCorp investors remained nervous about poor fundamental conditions in the potash industry, but they hoped that the turnaround they've been waiting to see would finally show signs of taking root. For its part, PotashCorp's results included some less-than-perfect news on the earnings front, but record offshore potash shipments inspired some optimism among shareholders. Let's look more closely at PotashCorp's latest results to see whether investor enthusiasm is justified.

PotashCorp helps feed the world
PotashCorp's second-quarter results showed the continuing pressure that the company has been under lately. Revenue sank 8.5% to $1.73 billion, although that was actually slightly better than the $1.71 billion investors expected PotashCorp to bring in. Net income fell a steeper 12% to $417 million, and the resulting earnings of $0.50 per share missed the consensus forecast by a penny.

Looking more deeply into the figures, PotashCorp saw different performance between its potash operations and its nitrogen and phosphate units. Potash revenue actually inched higher from the previous year's quarter, with total sales volumes in line with 2014 figures. An 18% climb in offshore shipments made up for weaker results within North America, as shipments from the Canpotex marketing group -- of which PotashCorp is a primary member -- hit record levels because of better logistics and infrastructure for distribution. Potash prices rose $10 to $273 per tonne during the quarter as market conditions worldwide generally improved.

Weakness in nitrogen products weighed on PotashCorp's results. Sales volumes were flat, but a nearly $60 drop in prices to $334 per tonne resulted from increased supplies of nitrogen-based fertilizers in key regions, causing net sales to fall by a sixth from year-ago levels. Lower natural-gas costs helped offset the impact on operating earnings but couldn't wipe it out entirely. Phosphate product sales also posted a substantial 13% decline in dollar terms, but a huge decline in cost of goods sold actually led to a 50% increase in gross margin for the unit, as better pricing conditions outweighed poorer sales volumes.

CEO Jochen Tilk highlighted the best parts of the report, noting that "while we have faced some near-term market headwinds, we are encouraged by the strength of global potash demand, especially in offshore markets." Tilk expressed confidence that these better demand conditions would last into the future.

Can PotashCorp build some positive momentum?
For the most part, PotashCorp maintained a fairly stable view of its immediate future. The company still sees global potash demand remain strong, projecting industrywide shipments of about 60 million tonnes. North American volume has been strong despite lower prices, but weak conditions in Latin America, especially in the key Brazilian economy, could hold back demand. PotashCorp remains optimistic about China and India, with both markets showing signs of continued strength and improving conditions. Even though the threat of currency disruptions remains, PotashCorp seems generally optimistic about the market.

PotashCorp's own guidance, though, included some less favorable revisions. The company narrowed its earnings range to $1.75 to $1.95 per share, cutting the top end of the previous guidance range by a dime. Third-quarter guidance of $0.35 to $0.45 per share is slightly on the low end of the $0.42 per share in profits that investors currently expect, and the company cut the upper end of its range on potash gross margins by $100 million. Still, PotashCorp expects greater income from offshore equity investments, as dividend income from Israel Chemicals has been greater than expected so far this year.

Overall, PotashCorp investors seemed willing to overlook near-term weakness and instead look to what appears to be the beginning of a longer-term turnaround, as the stock rose 3% in the first hour of trading following the announcement. With a 5.5% dividend yield, the possibility of a major acquisition, and improving fundamentals, investors are hopeful that PotashCorp has gotten through the worst of its downturn and can sustain a rebound.