In this article, let's take a look at Potash Corp. of Saskatchewan, Inc (POT, Financial), a $30.61 billion market cap company, which is the world's largest integrated fertilizer and related industrial and feed products company by capacity.
The Largest Producer
While Potash Corp is involved in the production of all three primary crop nutrients, potash remains the top of the firm's operations. The company is the largest producer of potash worldwide, estimating that its potash operations represented 15% of global potash production and 19% of capacity. Last year, the company estimated its phosphate operations produced 5% of world phosphoric acid production. In addition, it estimated that its nitrogen operations produced 2% of the world's ammonia production.
Potash operations accounted for 41% of sales and 56% of gross profits in 2013. In addition to potash, the firm produces nitrogen and phosphate fertilizers. These industries have lower barriers to entry than potash. From a competitive standpoint, we rate the firm's phosphate operations as more attractive than its nitrogen business.
Heavy Expansion
Potash’s expansion projects of $8 billion are the key driver for the future. With the aim to expand its potash production capacity, the operational capacity is expected to reach 17 million metric tons by 2018, this will be a source of sustainable earnings potential for the company. Further, natural gas which is a primary cost for the nitrogen segment is having a price decrease compared to historical averages, so this key cost driver will impact the bottom line.
Long-Term Contracts
In the Nitrogen segment, the firm is the third largest maker of nitrogen in the world and accounts for almost a third of sales. The company produces ammonia at three plants in the U.S. and one in Trinidad. Ammonia production is rising year by year, with 3.6 million metric tons in 2013 (3.2 million metric tons the year prior). The company has long-term contracts to purchase the majority of its gas from Trinidad. Natural gas prices are a major component of production costs. They are considerably lower in price than historical averages.
Dividend Policy
Potash Corp. has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 3.87%, which is good to protect the purchasing power, especially considering the consistency of track-record dividends payments (dividends have been paid since 1990) and favorable expectations regarding dividend growth.
Revenues, Margins and Profitability
Looking at profitability, revenue declined by 11.76% and this hurt the bottom line, decreasing earnings per share as well ($0.56vs $0.73).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| POT | Potash Corp | 18.54 |
| MOS | Mosaic Co. | -25.71 |
| BASFY | BASF SE | 17.42 |
| Industry Median | 8.82 |
The company has a current ROE of 18.54% which is higher than the one exhibit by BASF SE (BASFY, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20x, trading at a discount compared to an average of 20.8x for the industry. To use another metric, its price-to-book ratio of 3.3x indicates a premium versus the industry average of 1.55x while the price-to-sales ratio of 4.6x is above the industry average of 0.93x.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $12.899, about a 5.2% compound annual growth rate (CAGR).
Final Comment
The potash industry is an oligopoly with three big Saskatchewan producers (accounting for almost a third of total world production). We believe that potash prices could reach high levels if demand accelerates in countries such as China and India.
With respect to the phosphate fertilizer industry, we think fertilizer demand should grow in the future as farmers look to increase yields and a growing population.
Both things make me feel bullish on this stock. Hedge fund gurus like Steven Cohen (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), David Dreman (Trades, Portfolio), Murray Stahl (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio) and Manning & Napier Advisors added this stock to their portfolios in the first quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
