Concerned, but Not Alarmed
Potash of Saskatchewan is the world's largest potash company, the second largest nitrogen producer in the world, and the third largest phosphate producer. The company has been able to grab around 20% of the potash market, and the recent break-up of the joint venture between Russia’s Uralkali and Belaruskali in neighboring Belarus has sent prices tumbling. Brad Wall, Saskatchewan’s premier commented that “The problem is nobody is really buying anything right now.”
For the time being, Potash of Saskatchewan expects a 25% discount with respect to projections made at the beginning of the year. In line, full year-guidance is expected to be reduced in the upcoming third-quarter report. The good news is that demand should not be affected, because potash based nutrients are key in agricultural production for the U.S. and Brazil especially. For the same reason, Mr. Wall said his government was still considering proposals to change the royalty structure to shift the emphasis to production levels from prices. The good news is that planting area in Brazil continues to increase year-over-year, meaning that potash demand should increase.
On another note, the nitrogen and phosphate segments are expected to sustain previous performance levels. Analysts continue to highlight the benefits derived from an integrated operation for phosphate in opposition to the nitrogen segment. With the changes seen in the potash segment, this may be the right time to acquire access to natural gas for an integrated nitrogen operation. Such move, would boost Potash of Saskatchewan’s nitrogen market position, and improve margins for a very profitable segment.
Financially, Potash of Saskatchewan is moderate due to a high and declining debt. Currently trading at 12.3 times its trailing earnings, the stock is barely below the industry average. Due to the small discount, only one transaction has been registered for the last quarter. Brian Rodgers bought 3,250,000 shares to enter the top-five gurus holding the firm´s stock. I share his optimism since price has already dropped, is recovering ground steadily, and management modified the business strategy.
Up-and-Coming, or Steadily Declining?
Agrium is the largest agricultural retailer in the U.S., selling fertilizers, crop chemicals, and seed directly to farm customers, and a leading global wholesale producer and marketer of all three major agricultural macronutrients. In opposition to Potash of Saskatchewan, exposure to potash is smaller. In other words, Uralkali’s decision to break the Belorussian Potash Co. carries a smaller weight over the Agrium’s overall performance. Another important difference is Agrium’s retail segment in North America.
The weak point for Agrium is phosphate. More specifically, the company is experiencing a decline in demand from India. Changing regulation concerning local subsidies and progressive currency devaluation reduced phosphate imports, and the tendency is expected to continue through 2014 and 2015. Another downside to Agrium is the recurring legal issues it faces. For example, at the beginning of 2013 the firm, together with Potash of Saskatchewan and Mosaic, lost a case for price fixing. Further legal issues can dent a hole in revenues and the company’s reputation.
On the upside, Agrium holds the largest retail operations for seeds, crop nutrients and fertilizers. This characteristic allows the company to be on top of customers’ preferences, and operate its own research unit to better serve new market tendencies. Unlike Potash of Saskatchewan, Agrium holds an integrated operation for nitrogen. In other words, the firm produces in an integrated fashion all three basic nutrients. Although cost advantages are not considerable due to the business’ overall size, it guarantees a steady supply to retail businesses.
Financially, Agrium is strong since most indicators continue to improve year-over-year. Currently trading at 9.6 times its trailing earnings, the stock packs a 23% discount to the industry average. However, gurus have decided to remain on the sidelines. I understand their position since stock price has steadily declined since the beginning of 2013. I feel bullish about the stock but prefer to wait until the third-quarter report comes out on November 5th.
Chinese Hidden Hand
I prefer Potash of Saskatchewan because management has reacted cautiously to the news of a Belorussian Potash Co. breakup. Company leaders did not freak out sending the market into a dive to the bottom, and improving signs have reflected on a four-month stock price climb. Last, the firm’s international exposure and increasing demand for crop nutrients as planting area expands secures good prospects for the mid-to-long term.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.