Potash of Saskatchewan says wait until spring (at least)

02/01/2013 11:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

“Agriculture is inherently an unpredictable business,” fertilizer producer Potash of Saskatchewan said yesterday, January 31, when the company reported fourth quarter earnings.

After a statement like that, investors sure weren’t expecting good news and they didn’t get it. The company reported fourth quarter earnings of 52 cents a share (excluding non-recurring items.) That was worse than the 58 cents a share expected by the Wall Street consensus. For the full year earnings fell from $3.60 a share in 2011 to $2.45 in 2012, a 32% decline. Revenue dropped 12% year over year to $1.64 billion against the $1.73 billion consensus.

And as a topper the company lowered guidance for the first quarter of 2013 to 50 cents-65 cents versus a Wall Street consensus of 68 cents share. For the full 2013 year Potash told analysts to expect earnings of $2.75-$3.25 against a Wall Street consensus of $3.20.

So what’s the problem at Potash? Well, it’s actually not a problem at the company but with the entire potash fertilizer sector—if that’s any consolation for the stock’s 7.6% fall in the last 12 months. (After dropping 1.2% on the earnings news to $42.50, the shares are about half way between the $36.73 52-week low and the $48 52-week high.) Potash of Saskatchewan is a member of my Jubak Picks 50 portfolio http://jubakpicks.com//  )

The potash industry has too much capacity (and as the global swing producer Potash often cuts its own production to keep order in the market. The company announced the temporary shut down of four mines in October and November.) And there’s too little demand from China and India. China finally signed a new agreement with potash producers at the end of December but India hasn’t yet agreed to terms. The odds are good that it will now that China has inked a deal but that’s still not great news for the industry since the agreement signed with China by Potash, Mosaic (MOS) and Agrium (AGU) calls for a price $70 a metric ton lower than the agreement that expired on June 30.

Potash of Saskatchewan sold 1.3 million metric tons of potash in the fourth quarter at an average realized price of $387 a ton. Wall Street had projected a price of $439 a metric ton. The company’s sales of potash in North America climbed by 39% but sales outside North America fell by 37%. For 2013 the company said it expects global potash shipments of 55 million to 57 million metric tons, up fro 51 million tons in 2012.

Potash didn’t report bad news in all its fertilizer segments. For its nitrogen fertilizer unit, the company reported strong demand and higher prices. In the quarter Potash’s nitrogen unit recorded a record gross profit.

That wasn’t enough to save the quarter since Potash is predominantly a potash producer, but it does suggest that fertilizer companies with a bigger exposure to nitrogen fertilizers, such as Yara International (YARIY), could do better than their potash-heavy peers.

As for Potash of Saskatchewan itself, I’d wait a month of two to see how the spring planting season is shaping up and if orders are strong enough to draw down dealer stocks.

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 any stock mentioned in this post as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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