The Future is Bright for This Company
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Food prices are constantly rising because of an increasing global population, improving diets in developing countries, and easy monetary policies in developed countries. Another great reason for this rise is the agricultural conditions, which is not at all favorable in the United States, Russia, and Australia because of drought. India is also facing a weak monsoon season. As food is the life blood of human beings similarly, potash is also the lifeblood of the crops.
Potash Corp. (NYSE: POT) plays a pivotal role to palliate these problems. Potash Corp. is the world’s largest crop nutrient company, and plays an integral role in global food production. The company is the number one producer of potash in the world, which is mainly used to fertilize soil. Potash is also used in feeding farm animals, and in a variety of industries. This crop nutrient company is also the third-largest producer of phosphate, and nitrogen in the world. The shares of this company appear to be reasonably priced, and the company is very much dedicated to provide long-term shareholder value. Recently, the Board of Directors of this company has approved an increase of the company's quarterly cash dividend (from $0.14 per share to $0.21 per share), and declared a quarterly cash dividend of $0.21 per common share payable November 5, 2012 to shareholders of record on October 15, 2012. This will smooth the volatility of its shares, and somewhat limit any downside.
BHP Billiton Limited (NYSE: BHP), the diversified natural resources company operates nine customer sector groups (CSGs): petroleum, aluminium, base metals (including uranium), diamonds and specialty products, stainless steel materials, iron ore, manganese, metallurgical coal, and energy coal. From the year 2010, this company added several other companies in its portfolio which includes Athabasca Potash Inc., Petrohawk Energy Corp., and Leighton Holdings Limited's Pilbara Contracting Unit. BHP made an offer to acquire Potash Corp in 2010 for $130 per share, which was unsuccessful after Potash Corp demanded $170 per share. The shares are down about 5% from mid-November of 2010, when Potash made it clear that BHP offer was inadequate, while the S&P 500 is up over 22% for the same period. Shares of this fertilizer company currently are trading at about $43, and the company has about 860 million shares for a market capitalization, and enterprise value of $36.5 billion, and $40.3 billion, respectively. This makes Potash Corp. the largest company in the fertilizer field. We can take a look at Mosaic Co (NYSE: MOS), Agrium Inc. (NYSE: AGU), CF Industries Holdings, Inc. (NYSE: CF), and Intrepid Potash, Inc. (NYSE: IPI) having market capitalizations of $26 billion, $16.5 billion, $14 billion, and $1.8 billion, respectively.
For an estimated price earnings ratio of about 14, this manufacturer expects to earn between $2.80 and $3.20 per share in 2012. The earnings per share would have been better if not for a $0.39 per share non-cash charge related to the company investment in Sinofert, which was an accounting requirement. When BHP made its bid for the company, the price to earnings ratio was 22+ times 2010 earnings of $1.90 per share (split adjusted). The current price of $66 per share or 53% higher from recent price levels will be there if, a price to earnings ratio of 22 for Potash is assumed.
Competitors of this producer such as, Mosaic, Agrium, and CF Industries, trade at lower price to earnings ratios of 12.1, 10.1 and 8.3 respectively. Based on price to earnings ratio of 19.8 for 2012 estimated earnings, Intrepid Potash has a higher value. The reason behind this valuation is that, Potash Corp has earned 64% of its gross income from its potash operations in its most recent full year, which is compared to 47% and 12% for Mosaic and Agrium. CF does not have significant potash production, while Intrepid Potash is essentially a 100% potash producer. For a long-term optimal yield, all crops need potash, which has a limited supply while nitrogen is virtually unlimited. So, farmers can postpone potash application for a few years, but not for an indefinite period. According to Potash Corp, the year following a drought year usually has an increased demand for fertilizers. In addition, due to economic uncertainty many dealers have depleted their stockpiles of potassium based fertilizers, and reserves are at a multi-year low.
Profitability Point of View
From the above chart, it is evident that Potash Corp is one of the most efficient companies with a gross income margin of 49.2%. On a tangible book value to price basis, MOS, AGU, CF, and IPI have ratios of 2.6, 3.7, 4.8, and 2 respectively but, POT has the second highest value of 4.2. However, this is in line with the market average of 4.6. For an annualized yield of about 2%, the potash manufacturer pays a quarterly dividend of $0.21. This is in addition to repurchasing $6.3 billion of its own shares since 1999 and compares well to annualized yields of 1.6%, 1%, 0.7% for Mosaic, Agrium, CF Industries, and Intrepid does not pay a dividend. Bill Doyle, President and Chief Executive Officer of POT said, "As we near completion of our potash expansion program, we see tremendous opportunity to continue our long track-record of enhancing shareholder returns through the strategic use of capital".
Recent Developments of the Company
Finally, in the past few years, India has relied mostly on nitrogen fertilizers, which boost yields in the short term. Currently, the potash application in India is at record-low levels, and the country is in need to increase its potash application if it wants to feed its population at a reasonable price. According to Potash Corp, India is one of the potash industry’s most important customers, with expected demand this year of as much as 6.9 million tonnes. The lack of a firm supply contract has created some uncertainty in the potash market. Although, potash prices and demand have moved steadily higher, customers around the world have accepted this price increase except India. India does not want to pay more than $420 a tonne for potash imports, and the government is offering a subsidy that supports that price. Doyle said, “Hopefully next time, we can keep everyone’s blood pressure a little lower on the Indian side, because it really is not helpful. But we’re going to get there (to a contract).”
To End Up With
Potash Corp is well-positioned to benefit from an increase in demand for fertilizers as early as the Spring of 2013, as it is the largest producer of potash, and the third-largest producer of phosphate and nitrogen in the world. This demand should remain relatively stable as the world population, and demand for food continue to grow. In addition, farmers are generating huge returns at current crop prices, which motivates them to apply fertilizer to boost yields, and fertilizer represents a relatively low percentage of their overall production costs right now. Its stock price is at attractive levels due to a number of reasons, including economic uncertainty, risk aversion, and an over-supply of potash in early 2012.
The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, expanding profit margins, good cash flow from operations, and notable return on equity. These strengths outweigh the fact that the company has had a sub par growth in net income. There are plenty of reasons to have POT in your portfolio from a long-term perspective. POT’s common stock seems like a very good investment due to its valuation and the tailwinds, which may soon turn into a full-blown gale.
abirk has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.