Friday, 26 July 2013

Potash Corp - 2013 Second Quarter Update

Potash Corp's second quarter was somewhat weak, and the softness is expected to continue for the remainder of 2013.  Indeed, EPS fell from $0.99 (as adjusted) to $0.72 in the quarter, and full-year guidance was lowered to $2.45-2.70 from $2.75-3.25.  However, some perspective is in order: even at the low end of that range, the company's return on equity will still be around 20% for the year, despite steadily growing assets, as its capital expansion continues, and moderate amounts of debt (an immoderate amount of debt reduces equity, and artificially boosts ROE).
At about 56 million tonnes, global shipments of potash are expected to be in line with last year.  However, because it's requiring a lower price to keep volumes steady, it cannot be denied that the market has weakened since last year.  Realized potash prices fell significantly in the quarter, from $433 to $356, an 18% drop.  Nitrogen and phosphate prices fell, as well.  Also contributing to the weak second half forecast is the lack of a potash contract with China, which will stall sales in the third quarter, though CEO Bill Doyle predicts an agreement will be forged before the fourth quarter.  In addition, currency headwinds are affecting results: a weaker rupee is part of the reason Indian demand has been soft (the major cause remains a domestic subsidy that punishes potash purchases relative to nitrogen), just as a weaker real has offset some of the strength in Brazil.  In the latter case, because Brazil is a major exporter, the economics roughly balance out, since a weaker real means higher US dollar prices for goods sold.
While the softness in the potash market has lingered longer than many investors and analysts had expected - and may persist for the short or even medium-term - the industry's long-term strength remains intact.  People must eat.  In fact, the latest estimate of how many people are going to be eating in the decades to come was recently revised upward, from 10 billion, to a staggering 11 billion, by 2050.  While eventually there will be greenfield supply to meet growing demand, little is likely to come on-stream over the next decade.
Potash Corp shares trade for under $40, but the company's stock market investments are worth $8 per share.  Even after adding back a little over $3 per share in debt (net of cash), the "all in" cost of a POT share is $34-35.  This means that Potash Corp shares are trading at just 13-14 times 2013 earnings, using the mid-point of the newly announced guidance.  Happily for shareholders, management announced a $2 billion share repurchase that will retire up to 5% of shares outstanding over the next year.  This may be increased next year, management noted, as capital expenditures fall, and the already significant dividend could be upped, too.  Investors may want to follow the company’s lead and buy some Potash Corp stock at today’s low prices.
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