I'd sell shares of Potash of Saskatchewan into this rally on the company's lowered guidance for 2012

07/27/2012 3:34 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

After the results that Potash of Saskatchewan (POT) reported on July 26, I’d use the current strength in fertilizer stocks--on soaring crop prices (because of a severe drought in the United States and elsewhere) and on the general stock market bounce on hopes that the European Central Bank will do something when it meets next week--to sell shares. Even if you continue to like the fertilizer sector—and at current valuations and with current projections of increased supply I’m not a fan—the company specific news from Potash argues that you should find another horse to ride.

With this post I’m selling the stock out of my Jubak’s Picks portfolio http://jubakpicks.com/ with a 0.9% gain since I added it on April 4, 2012.

For the second quarter Potash announced earnings of $1.01 a share, a penny below the Wall Street consensus. (That’s discounting a one-time write down of $341 million on its investment in a Chinese fertilizer company.) Revenue came in at $2.4 billion, slightly above the $2.38 billion analyst projection, but still essentially flat—up just 3.1% from the second quarter of 2011—with the previous year.

Guidance for third quarter and the rest of 2012 was the bigger problem. Potash told analysts to expect earnings per share of 70 cents to 90 cents for the third quarter against the current Wall Street estimate of 95 cents a share. For 2012 as a whole the company said earnings will be in a range of $2.80 to $3.20 a share. That’s down from the company’s prior projection of $3.20 to $3.60 a share.

The lowered guidance is a result of rising costs. The company said it faces significant scheduled maintenance and production downtime in the third quarter. That won’t lower Potash’s sales volume—the company had stockpiled potash in anticipation—but it will add to costs at the company. In addition, the company said that expansion of its potash production facilities in New Brunswick will result in an additional $496 million in capital spending.

Unfortunately Potash isn’t expecting a big increase in demand or prices that would let it offset higher costs and capital spending. Prices and volume in the second half of the year will be relatively similar to those in the first half of 2012, the company said, with total global potash demand of 55 million to 58 million metric tons essentially unchanged from the 55 million tons of 2011. Lower demand from the Indian market has offset strong demand in Latin America and the United States in the first half of 2012. Reduced government subsidies have left many Indian farmers unable to afford fertilizer—and a depreciating rupee for hasn’t helped. (India faces elections in 2014, which is likely to lead to an increase in subsidies. But that’s 2014.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Potash of Saskatchewan as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/ .

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