Why These Stocks Could Be Too Salty for Your Liking

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PotashCorp (NYSE: POT) investors were left with nothing by the time 2012 ended – the stock was 5% in the red. Potash sealed its fate. The salt dug holes in Mosaic’s (NYSE: MOS) bottom line as well, though Mr. Market was benevolent enough to let the stock end 2012 with a 9% gain.

So what has bumped the two stocks 4% each since New Year’s Eve? One deal from China, that’s about it. Yes, I repeat, that’s about it. Because although it was a critical deal, I personally don’t feel it’s enough to tag either of these companies as top bets in their space. Growth catalysts aren’t many, associated ifs-and-buts are aplenty. And valuations don’t hold much promise for such uncertainties.

Down, and out

PotashCorp expects to earn not more than $2.80 per share for 2012 (we’ll know once it reports on Jan. 31), which would be a significant dive from $3.51 earned in 2011. To tell you how Mosaic fared last year, I’ll have to break its numbers up, for the company funnily ends its fiscal year in May (thank goodness it is transitioning to Jan-Dec format this year onwards!). For the three months ended May. 31, 2012, Mosaic’s EPS slumped 18% year-on-year. For the six months ended Nov. 30, its EPS was down ten cents to $2.48. One more example: Intrepid Potash’s (NYSE: IPI) stock ended 2012 with 8% losses, and its EPS fell 13% for the nine months ended Sep. 30 year-over-year.

Such dismal results, despite record 2012 spring planting in the U.S., which means robust domestic markets can’t sail these companies through. So when China and India stopped shopping last year, members of potash-export controlling cartel Canpotex were forced to idle machines. Yes, PotashCorp, Mosaic and Agrium (NYSE: AGU) had a bad time. Naturally, a contract to supply 1 million tonnes of potash to China-based Sinofert Holdings through June 2013 is big news. At least one major customer is out of hibernation.

But…everything comes for a price

If quantity is large, the price is low. From the $470 that Canpotex commanded from Sinofert last March, it is down to $400 this time around. That’s also significantly lower from, say, Mosaic’s average selling price of $453 per tonne this past quarter.  Naturally, profits won’t jump the sky as a result of the deal. The bigger catch is that this low price is likely to have spill-over effects on contracts from the other major customer, India.

The last deal India signed with Canpotex was in August 2011 at prices averaging $500 per tonne. Since then it is waiting for prices to ease; and while doing so, also proving to the world what huge bargaining power it enjoys. After China, many feel a contract from India might be on its way. Well, here are some points to ponder:

  • According to Bloomberg, India’s potash inventory is enough to last till March, after which its need through 2014 won’t exceed 3.5 million tonnes. Mind you, these numbers were given by none other than the managing director of India’s largest potash importer company. So they certainly hold water. Now 3.5 MT over two years is a figure you’ll sneeze at if I tell you that the nation imported around 6 MT in 2011 alone! Yes, India is side-lining potash big time. Here’s a graph that PotashCorp presented during Morgan Stanley Global Chemicals Conference last November. It tells a lot about the 'India Fertilizer Market Situation.'


<img src="/media/images/user_13296/untitled_large.jpg" />

  • Analysts are harping on how India could soon double its potash demand once it realizes how distorted its nitrogen to potash or phosphate usage ratio is. The left side of my brain tells me, a nation that has continuously and increasingly substituted potash with nitrogen-based fertilizers year-after-year for more than a decade won’t change the equation so soon.
  • India seems to favor Russia over the U.S. for its potash supplies. While it is already negotiating with Belarusian Potash, the other cartel that controls the global potash supply, talks with Canpotex are still nowhere in sight. Moreover, even when a contract comes by, it is unlikely to be priced higher than $400. So a low base price would be set, much to the disliking of Canpotex members.

It’s simple: India will continue to keep Canpotex members on tenterhooks.

So who needs to worry most?

As the major stakeholder, PotashCorp controls more than half of Canpotex’s potash supply. Correspondingly, half of PotashCorp’s total sales come from the cartel. Naturally, the potash king counts most worry lines when orders dry up. Mosaic toned down its sales volumes projection for the full year despite the Sinofert deal. Can’t blame the company that gets more than 65% sales from markets outside the U.S. with India accounting for more than 20% of it.  Mosaic has a 37% stake in Canpotex.  

Worse, PotashCorp and Mosaic derive 23% and 22% phosphate sales, respectively, through the association PhosChem, which in turn sells a whopping 54% phosphate to India. Again, there’s no fresh contract in sight. Mosaic especially needs to worry as phosphate make up 70% of its total sales.

Where do growth estimates of these companies stand? Analysts foresee PotashCorp growing at 12% this year, but an insipid 4% over the next five years. Personally, I think 16 times earnings is asking too much. At 14 times earnings, Mosaic isn’t exciting either with growth pegged at just 8% over the next five years.

Better off?

Agrium wins hands down as it’s more a nitrogen play. Potash and phosphate make just 11% of its total sales. Nitrogen is the most important nutrient for corn, and needs to be re-applied to soil every planting season unlike potash or phosphate which is retained in soil to some extent. It is also more profitable. Small wonder then that Agrium and CF Industries (NYSE: CF) topped the performer list last year with 39% and 27% gains, respectively. At 13 times P/E, Agrium is also relatively cheaper, and has a lot brewing inside that makes it an intriguing play. CF wins the most attractive stock crown at 8 times P/E.

Oh, did I forget to mention Intrepid? Well, the small fry is insulated from the India-China fiasco as it sells 95% produce to the U.S. markets. Rest goes to Latin America and Canada. Intrepid still has a long way to go, but boasts good margins and solid financials.

I am not writing these stocks off. Only, upside potential might be limited in some. Do your own math, and decide. To make things easy for you, I’ll keep coming up with detailed analysis on these companies. Just stay tuned!

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Neha Chamaria has no position in any stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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