It’s time, once again, to own shares of Canadian-based agricultural giant Potash of Saskatchewan (NYSE:POT). Why should you want shares of a company that’s likely to finish 2012 with about an 18% decline in year-over-year EPS? Why buy a stock that has been lagging the market over the past couple of years?
Check out their longer-term record. Here are their split-adjusted, per share numbers over the past dozen years (including Q4 2012 estimates).
The road was bumpy due to the cyclical nature of the industry and its exposure to commodity pricing. It would be hard to criticize management performance. It would also be hard not to notice that the shares have provided 1100% in total return since Dec. 7, 2000 on a split-adjusted basis.
Over the past 10 years POT shares have outperformed 85% of the 1700 stocks in Value Line’s main research universe (5th percentile is lowest, 100th is best.)
Low percentile rankings in stock price stability and earnings predictability actually make POT a more attractive stock. The high volatility provides periodic chances to buy and sell at favorable prices.
Buyers during 2008’s commodity boom (when EPS hit an all-time high of $3.67) got over enthusiastic and pushed the shares north of $80. At that year’s pinnacle they fetched 21.9x full year projections. The yield was a worst-ever 0.16%.
It was a classic case of good news/bad valuation.
Traders dumped the shares later that year during the overall market meltdown, perhaps sensing that the recession would dent results badly.
They were right about a coming collapse in EPS. They were wrong to sell, though.
EPS plunged by 70.6% (from $3.51 to $1.06). Smart contrarian buyers got the chance to quadruple their money in less than two and a half years.
2011’s high of $64 anticipated the rebound to near record earnings that was on tap. POT’s early year $64 price tag, above average P/E and still-meager yield made that a good time to sell, rather than buy.
2012 is expected to be the third time since 2001 that full year EPS will experience a decline. Buyers during the first two periods like that (2002 and 2009) were well rewarded. They got paid for realizing that the best bargains were available before trends have clearly reversed.
Management has been positioning for the next up cycle. Their confidence was shown with two separate dividend increases this year which tripled the quarterly payout from 7 cents to 21 cents.
The new, higher amount combined with the depressed share price leaves POT with a 2.13% current yield. That’s the best ever for POT. At just a 29.2% payout ratio there is plenty of room left for future hikes.
Consensus views for 2013 center on a partial earnings rebound to $3.35. That’s not aggressive considering that peak EPS were higher in both 2008 and 2011. A regression to a still-below-average P/E of 15 supports a 12-month price target of $50.25.
If anything, that goal may prove to be too conservative.
The downside appears to be limited. Even the worst sell-offs during 2011 and 2012 never took POT below $38.40 and $36.73 respectively.
I’m not alone in my thinking. Well-respected research firms Morningstar and Standard & Poor's each assign 4-star (out of 5) BUY ratings to POT.
The former service sees POT’s present day fair value as $50.38. S&P is looking for a move to $59 over the coming year.
A confluence of factors including this year’s drought conspired to temporarily hold back POT shares. That is exactly the circumstances that value-oriented investors should be seeking when making new commitments. Why wait for the good news and the accompanying higher entry point?
Buy POT while their yield is high and the valuation is low.
Disclosure: Long POT shares
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