Potash Corporation's (POT, Financial) stock has underperformed broader markets in the last year. While the S&P 500 has gained over 13% in the past year, Potash Corp. has declined 10% in the same period. I believe the stock offers a good value at current levels. Here's a look at the company in detail.
Potash Corporation is a corporation organized under the laws of Canada. The company is the world’s largest fertilizer company by capacity producing the three primary crop nutrients: potash, nitrogen and phosphate.
Potash operations: The company is the largest producer of potash worldwide by capacity. In 2014, the company's potash operations represented 20% of global potash capacity. The company owns and operates five potash operations in Saskatchewan and one in New Brunswick.
Nitrogen Operations: The company's nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. Its nitrogen operations represented 2% of global nitrogen capacity. The company have nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad.
Phosphate Operations: The company's phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, phosphate feed and industrial acid, which is used in food products and industrial processes. The company's phosphate operations represented 3% of global phosphate capacity. The company have phosphate mines and mineral processing plant complexes in Florida and North Carolina. The company also has four phosphate feed plants in the United States and produce phosphoric acid at Geismar, Louisiana facility.
Potash Corp.'s stock looks attractive from medium term perspective. The company is benefitting from strength in global potash demand and its EPS is expected to increase 3.8% in the current year and 13.2% in FY2016. However, the real inflection point will come in 2017 when the company's low cost Rocanville and Picadilly operations enter production. According to UBS analyst Brian MacArthur:
“Potash Corp is positioned to benefit from a significant ramp-up of low cost production through 2017 as its new Rocanville and Picadilly operations enter production. The current expansion at Rocanville and ramp-up at Picadilly will increase Potash Corp’s production capacity by nearly 4Mts and should contribute to materially lower costs. In addition, as these mines ramp-up through 2017 capex will decline and free cash flow should increase."
The company's potential to increase revenues and earnings from new production facilities, coupled with declining expansion spending bode well for its free cash flow profile and the company can return excess cash to shareholders through buy backs and dividends. Potash Corp is trading at a forward P/E of 15.40 and has a forward dividend yield of 4.70%. According to Gurufocus DCF calculator, the company has a business pedictability rating of 3.5 star and offers margin of safety of 31%.
The company's low valuation, high dividend yield and improving fundamentals makes me bullish on the stock.
