A Dream You’ll Love to Own

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

“In dreams begin responsibilities.”

-William Butler Yeats

Agriculture has proved to be one of the most resilient sectors in recent times. Yet, some companies have unfortunately left investors in foul moods. PotashCorp (NYSE: POT) is a sad example.

The stock is down 30% over a two-year period, giving up around 8% over the past year. PotashCorp’s recently released 2012 numbers – 9% lower revenue and 32% lower net income year-on-year -- explains the dismay. The question is: After a painful year, can PotashCorp investors expect something better in 2013? The answer is a hopeful yes. And then, there’s the dream to chase.

The catalysts

The major reason for a slump in PotashCorp’s sales last year was absence of interest from key global markets. For a major part of the year, PotashCorp and other members of Canpotex (the legal cartel that controls all potash exports out of Saskatchewan) were idle as China and India kept mum on potash needs. It was only on New Year’s Eve when China gifted Canpotex a 1 million-tonne potash contract that would take care of things till June 2013. That was also the first major trigger for stocks of PotashCorp and Mosaic (NYSE: MOS), the other potash player. Mosaic kept the ball rolling by trampling Street estimates, projecting record potash and phosphate shipments for 2013 some days later. By Jan. 25, the stocks had gained roughly 18% each from the beginning of the year.

Last week, India put the uncertainties to rest by signing a 1.1 million tonnes contract with Canpotex for potash supply. The good part is that India will pay $27 per tonne more than what China had agreed upon. The bad news is that India’s contract runs through January 2014, which logically means there won’t be any more contracts this year. China has kept its doors open.

Yes, these two deals mean good work for PotashCorp’s idled machines as more than half of the company’s namesake nutrient sales come from Canpotex. With U.S. spring orders also already flowing in, the company should be busier than it was last year. For the latter half, Latin America is likely to keep things moving as most are pegging it to be a record planting year. Mosaic forecasts 31 million tonnes this year, which would be the highest-ever nutrient application by Brazilian farmers. Overall, PotashCorp expects global potash shipments to be anything between 8% and 12% higher this year. Even if prices remain subdued, that would mean higher revenue for the company in the end.

Why what they say matters

The brightest spot in PotashCorp’s 2012 was probably the record gross profit its nitrogen business earned, coming in just under $1 billion. That’s a significant share of the company’s total gross profits of $3.4 billion. Nitrogen, which is also the most widely applied for essential crops like corn, clearly saved PotashCorp’s face in what was otherwise a stinker year. PotashCorp investors would be wise to pin hopes on this nutrient this year as well if they want to see their company growing. In fact, investors should keep on their toes as CF Industries (NYSE: CF) and Agrium (NYSE: AGU) suit up with numbers over the next two weeks. As both are nitrogen-centric companies, their performance and outlook matter for every company that deals in the nutrient.

Agrium has already struck the right note by bumping its fourth-quarter earnings expectations up just days before the release – from $1.50 to $1.90 forecast earlier, Agrium’s EPS could pass the $2 mark. Analysts were quick to revise their own calculations from $1.73 to $1.95 per share. CF Industries might not have provided such perks, but is set to end 2012 on a high note with record top and bottom lines. But this is one stock that has seen many heartbeats skip because of its massive recent run up and three-figure prices. I don’t know why analysts peg its fourth-quarter revenue and EPS to be considerably lower than last year’s. And why Wall Street expects CF to shrink this year is too tough a nut to crack for my little brain. With strong spring season in sight and seductive valuations, I’ll be Fool enough to not let CF slip away.

Now what is the probability of Agrium and CF making it or missing it on estimates and what that would do to their stock prices is something you’ll learn soon if you keep following my posts. For now, that both nitrogen specialists expect solid demand for the nutrient this year (expect detailed projections in their forthcoming earnings call) means PotashCorp investors too can keep their fingers crossed.

Start counting your checks

PotashCorp is looking to spend $800 million this year on capital projects. That’s likely to tone down to $500 million next year as major expansion projects near completion. Lower spending would also imply one important thing: PotashCorp will be sitting on bigger piles of cash to distribute to shareholders. The company already sports the best dividend yield among peers, and reveals how its dividends have grown a staggering 700% in just about two years’ time. That almost makes up for its morbid stock performance.

PotashCorp’s dream: To return more cash to its shareholders “than any other player in (our) industry over the next five to 10 years,” a promise it “certainly intend(s) to keep.” Now this is one dream you would certainly love to own. PotashCorp is a responsible company, and knows it has to keep its shareholders happy. Be a part of the company's growth story by adding it to your stock watchlist. Click here to add PotashCorp.

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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