March 4th, 2009:
Potash Corp. of Saskatchewan, Inc. (POT)
Current Price: $74.63
www.potashcorp.com
Potash Corp is an integrated producer of fertilizer, industrial and animal feed products. They are the world's largest fertilizer enterprise, producing the three primary plant nutrients: potash, phosphate and nitrogen. The company is the second largest nitrogen producer worldwide by ammonia capacity. Among these, potash – the main focus of their business – delivers the highest quality earnings. With large low-cost operations, plans to expand capacity significantly and strategic global investments, they have an unmatched ability to meet the needs of North America and growing offshore potash markets.
POT recorded a whopping 80% gain in sales in 2008 over the previous year. POT also saw a gain of 216.7% in net income and gross margin rose to $4.9 billion, a 161% increase over the $1.9 billion in 2007. For the fourth quarter of 2008, POT posted earnings of $788 million, or $2.56 per share, compared with $377 million, or $1.16 per share in the same period last year. This was POT's third most profitable quarter to date and they beat the average analyst EPS estimate of $2.28 per share. For the year, earnings reached $3.5 billion - more than triple the company's profits in 2007.
POT has about $9 Billion in revenue, nearly $277 Million in cash, and a compelling trailing P/E of only 7.
POT has potash assets unmatched by any other world producer, and is expanding to build their competitive strength. They completed construction of an additional 1.5 million tonnes at their Lanigan operation in 2008. Between 2005 and the end of 2012, they project that they will have added 10.1 million tonnes through debottlenecking and expansion, half of the industry projects being built worldwide in that time, with a total investment of CDN $7 billion.
Did you know, farmers have raised their potash consumption an average of 5.6% per year for the past five years? This compares to 2.7% for N fertilizer and 3.8% for P. Over the past five-year period cumulative world fertilizer growth has been greater than adding a market the size of the US or India, the second and third largest fertilizer markets.
The fact of the matter is, demand is rising and supply is falling. This industry is easily one of the strongest groups fundamentally right now because of secular trends. But, due to hedge fund redemptions/liquidations and the commodity sell-off, POT has been inexplicably sold off along with any and all energy or commodity related names making it an attractive agriculture play right now in our eyes.
Potash is used on a diverse group of agricultural commodities. Wheat, rice, corn, soybeans and sugar cane consume roughly 50% of the world’s potash. This diversity means that global potash demand is not highly dependent on the market fundamentals for any single crop or growing region. US use of corn for ethanol has grown in recent years but this segment of the market accounts for only 2% of world potash consumption. The global potash industry is operating at historically high rates to meet the significant growth in potash demand. With the industry running at or near full capability, world production in 2008 was limited to an increase of only 2..0-2.5%. This production is well below the 5.6% demand growth rate of the past 5 years.
So, simply put, fertilizer demand is outpacing supply. In addition to the supply/demand equation heading in Potash's favor, they are also seeing more favorable input costs. Natural Gas is one of the main agricultural input costs. And, as you've witnessed, prices of natural gas have fallen drastically which can only further POT's bottom line.
All in all, we feel POT could be a great long-term investment to reap the potential gains we expect to see in the Agriculture industry during an inflationary environment in the U.S.
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