Tuesday, January 12, 2010

Potash Corp. (NYSE: POT): Q4 Earnings Preview 2009

. Tuesday, January 12, 2010

By Stock Wizard

Potash Corp. (NYSE: POT), the world's largest fertilizer produce, is scheduled to release financial results for the fourth quarter on Thursday, January 28, 2010. Analysts, on average, expect the company to report earnings of 79 cents per share on revenue of $1.04 billion. In the year ago quarter, the company reported earnings of $2.56 per share on revenue of $1.87 billion.Potash Corp expects fourth-quarter net income per share to be in the range of $0.65 to $0.85.

Potash Corporation of Saskatchewan Inc. engages in the production and sale of fertilizers, and related industrial and feed products in North America. The company manufactures and sells solid and liquid phosphate fertilizers; animal feed supplements; and industrial acid, which is used in food products and industrial processes. It also produces nitrogen fertilizers, as well as nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate, and nitric acid.

The year 2009 was characterized by a confluence of factors that drove fertilizer markets to a virtual standstill. The fertilizer industry was hit hard due to credit crisis as tight lending conditions hurt farmers’ ability to take on loans – preventing them not only from making capital expenditures on things like tractors and other machinery, but also hurting their ability to buy fertilizer. As a result fertilizer demand plummeted while prices crashed.

Late in October, the Canadian potash company reported a sharp slide in third quarter earnings and revenue. However, it still managed to beat Wall Street estimates. Net income plunged 80% to $248.8 million or $0.82 per share, compared to $1.236 billion or $3.93 per share, in the year-ago quarter. Revenue tumbled 64% to $1.099 billion from $3.064 billion. Analysts, on average, expected the company to report earnings of 0.81 per share on revenue of $1.06 billion.Total gross margin fell to $346.2 million from $1.741 billion.

Potash sales for the quarter slumped to $423.4 million from $1.145 billion in the prior year. Realized potash prices for the quarter were down 34% from last year, and were sequentially lower by 18%, as declines in offshore contract prices led to a recalibration of spot market prices.The company now expects fiscal 2009 net income to be at the low end of the prior range $3.25-$3.75 per share. The company now expect its 2009 potash gross margin to fall within the range of $0.7-$0.9 billion and total shipments to be 3.0-3.2 million tonnes. The company anticipates that global potash demand in 2010 will approximate 50 million tonnes.

However, demand for fertilizers seems likely to increase in 2010, as farmers replenish soils following two years of limited applications. The recovery in the global economy is also expected have a positive impact on the crop nutrient business.

In the past two decades, the world’s population has grown by 28% from 5.3 billion people to 6.8 billion. Much of that growth has and will continue to occur in Asia and Latin America, regions that have become economic forces. The International Monetary Fund is projecting the economies of China and India will grow by 9% and 6.4% respectively in 2010. In those countries the first priority is to improve the quality of life now with luxury items but with better food. The impact was evident in steadily improving crop yields with farmers producing record harvest in the majority of years over the past decade.

Record crops draw more nutrients out of the soil and if you take more out you need to put more back just to maintain productivity.In the past 10 years global grain consumption increased by roughly 320 million tons equivalent to the size of the entire US corn crop. In the next decade we are expecting that the world demand is going to grow by further 350 million more tons of grain. The ability to increase food production by increasing the amount of land anywhere in the world is extremely limited. To meet this growing food demand it will be imperative to replenish nutrients in the soil and maximize yields. Farmers know this and they will start feeding their soil again. Although it's hard to predict exactly when the recovery will take hold, but a resurgence in fertilizer demand is inevitable.

It is also being expected that higher crop prices combined with lower input costs will buoy fertilizer consumption in 2010. Crop prices have been rising fairly consistent. Corn prices hit a six-month high in Chicagolast week as the late harvest reduced crop quantity and quality in the U.S.

Last month, Belarussian Potash Company, or BPC, a major potash exporter based in Minsk (Belarus), agreed to sell more than 1 million tonnes of potash to China at $350 a tonne in a deal that is likely to kick start global demand for potash as buyers had been waiting for the effective price floor set by this contract. Analysts consider China to be the lowest-price purchaser as it receives a discount because of the large volume represented by the country.

An improving agricultural picture, visibility with pricing, and the fear of inflation could all boost fertilizer stocks higher. Already, talks between Canpotex, the Vancouver-based marketing consortium of North American potash producers, and the Chinese have broken off due to a disagreement over price.

In retrospective, Potash Corp. is well positioned to benefit from a rebound in fertilizer demand and prices. The company's stock currently trades at a forward P/E (fye 31-Dec-10 of 20.38 and PEG ratio (5 yr expected) of 3.41.In terms of stock performance, Potash shares have gained nearly 68% since the beginning of the year.

Disclosure: Author does not own any of the stocks discussed here.

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