"Potash Corp. of Saskatchewan (NYSE: POT) has been reporting exceptional results, surpassing expectations," says analyst Tom Slee, adding, "However, investors have savaged the stock."

The contributing editor to Gordon Pape's Internet Wealth Builder explains, "The stock is down almost 58% from their high last year. No doubt about it, demand for fertilizer has weakened but this is an overreaction." Here's his review.

"POT turned in earnings of $2.56 a share for the fourth quarter (all dollar amounts are in U.S. currency) easily beating the $2.28 analysts were anticipating. Potash and nitrogen numbers were extremely good but phosphate gross margins were somewhat disappointing. 

"There was also a sharp drop in North American phosphate sales, down 40% from the same period in 2007, due to a late harvest. However, that suggests fall applications were deferred to the spring. Consequently, we should see a surge in sales during the early part of 2009.

"For the year, Potash earned $3.5 billion, or $11.01 a share, more than triple the $3.40 a share in 2007, thanks mainly to soaring fertilizer prices. At the same time, it was encouraging to see that management maintained tight controls during the boom times. Dec. 31 gross margins were more than 60% better than in the previous year.

"Looking ahead, Potash faces a bottleneck in U.S. phosphate deliveries because dealers filled their warehouses just before the economic tailspin caused farmers to back away. That will have to cleared before prices recover and is bound to hurt POT's first-quarter numbers. 

"Beyond that, the prospects are excellent. Unlike most other commodities, fertilizer is not really cyclical. Certainly, prices fluctuate but there is underlying and growing demand for more food. The world's population is increasing by 75 million people a year. 

"At the same time, people, especially in the emerging countries, are upgrading and increasing the amount they eat, so much so that farmers are unable to meet the demand.

"There were record crops in 2007 and again in 2008 but grain stocks remain substantially below historic levels. We need to grow more, much more, and the best way to do that is by adding fertilizer. Studies show that $1 spent on fertilizer can raise a farmer's return by $3.

"I think that Potash, sitting on almost 100 years of reserves and benefitting from low-cost operations, is going to do very well over the long haul. It's in the right business at the right time and legendary investor George Soros agrees - he just upped his stake in the company. 

"Earnings of $11 a share are expected this year followed by a jump to $14 a share or more in 2010. That means POT is trading at a low 7.6 times projected 2009 earnings and is excellent value.

"However, I would accumulate the shares gradually. Potash is still regarded by many investors as just another cyclical commodity stock. As a result, it may lag a little despite the impressive earnings. Buy Potash Corporation on price pullbacks with a target of $150."

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