Despite the stock becoming cheaper by the quarter, I think the GuruFocus Fair Value estimate is justified. Today, the price sits at $20.17, down 50 cents (2.4%), and down more than $15.38 (44%) in the last year. It’s not a secret that Potash Corp. of Saskatchewan (POT, Financial) is the world’s largest producer of potash fertilizer by production capacity. The question is whether it's worth $46 a share or not.
De Ja Vu
In 1997, Potash attempted to buy K+S, a German-based company who’s Legacy Project would make it the only potash supplier with production sites on two continents. Of course, private shareholders of K+S held 30% of the shares and backed the rejection of the Potash acquisition proposal.
$3.51
That’s what the company earned in 2011. The total for the last 12 months is just $1.81. That equates to $1.51 billion in net income on $6.40 billion in sales. Both of these numbers are down year over year, and despite a history of growth, this could be the norm going forward. One thing is clear, it’s a major contributor in the diminished market value of Potash.
Five years ago, it was a $60 stock. In that time, the company has gone to great lengths (unsuccessfully) to bolster the price including buying back 8% of the shares outstanding, increasing the dividend substantially and lowering the capital spend rate.
Buy Under $20
Potash Corp. is wrapping up an $8 billion expansion and operational capacity is expected to reach roughly 17 million metric tons by 2018. Price per metric ton is down to lowest levels in seven or eight years. Maybe it stays here forever or drops further, but we could also see a rise in price back to $400.
Regardless of how potash the fertilizer trades, Potash Corp. gives a healthy 7.5% dividends and once the new expansion is online, will be generating a steady $5+ billion per year at the current potash price point. Dividend is safe. Earnings are steady. The company’s market share has a fairly large margin of safety because of the staggering costs to enter the industry. The fertilizer industry is driven by food grain demand and prices.
I look at valuation from two fronts: potential and history.
With Potash Corp., all the key financial drivers —Â revenue, income, and book value — are up in the last decade, while the company has bought back a great deal of its shares.
The Last Decade:
Sales: 85%
Profit: 182%
Book Value: 333%
Shares: -15.5% (163 total shares)
Currently, the company is on solid footing with $449 million in cash and just over $4 billion in debt. If the company could keep this level of growth for the next decade, this price point would be a no brainer, but, that’s where the risk comes in.
Historically, the company trades at a higher multiple for both earnings and book, as they should considering its position in the Agricultural industry. Controlling such a large share of a market that deals directly with food production is a great position to be in, especially with large barriers all around the entry point.
Potash Corp. will have a profitable future, but to what extent? I think as a baseline, investors should look for a $40 price in the next five years. Take out $1.50 per year for dividends, and you only need the stock to trade above $32.50 to double your investment.
If we think of it being tied to some multiple of earnings or book value, then either growth rate would need be fairly small going forward to justify that price. A 50% increase in earnings from today, along with a small (+10%) readjustment in P/E, the price would reach $35. The question is whether or not we’ll see a 50% rise in EPS by 2020.
