Stock pick: Potash of Saskatchewan
The company's volumes are up but earnings remain down, so it's still too early to buy.
Exactly what was going on with Potash of Saskatchewan’s (POT) second quarter earnings, last Thursday?
On the one hand, the company missed the consensus Wall Street forecast by 7 cents a share and lowered its guidance for the third quarter to 45 cents to 60 cents (versus the Wall Street projection of 74 cents) and for the full 2013 year to $2.45 to $2.70 from the previous guidance of $2.75 to $3.25 a share.
On the other hand, in its conference call the company said that potash demand for 2013 could approach the previous record level of 56 million tons. Buyers in all markets were actively securing supply, even though the Indian market remained weak.
Huh? Cuts in earnings guidance and a forecast of record demand? How do you put those together?
The answer is that pricing in the potash market -- a tight cartel of just seven companies controls the majority of the global trade -- looks to have cracked in the quarter with companies cutting prices to pump up demand. Pricing in many markets doesn’t look like it will get stronger in the next quarter or two. In China, where a contract for the next six months is pending, prices look headed for a 5% to 8% decline.
So, yes, volumes are up—maybe to something like the record to 56 million metric tons—but prices are down and don’t look like they are headed to a quick recovery.
The big problem for global demand seems to be the Indian market. After low orders over the last two years, there should be pent-up demand among India’s farmers, but Indian buying seems constrained by the country’s balance of payments problem and tightening credit. In the short term, as the current government faces an election, government policy will likely tilt toward higher food subsidies rather than more support for fertilizer purchases. But subsidizing food purchases while letting farm yields drop isn’t a viable long-term strategy.
I like fertilizer stocks as a long-term play on the rising global demand for food—which is why this stock is a member of my long-term Jubak Picks 50 portfolio, but I’d like to see some signs that potash pricing has turned before buying.
Despite its name, Potash of Saskatchewan also sells nitrogen fertilizers. Fundamentals for those fertilizers look to be bottoming, and the fourth quarter might see flat prices. I’d think about using that as an indicator for a buy. (I'd also like to see a few more delays/cancellations of mine expansions -- such as the recent news from Mosaic (MOS) and Vale (VALE) of a total of 6.3 million metric tons in delays.)
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Potash of Saskatchewan as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio.
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