Potash Corp. Earns $2.82, a 220% Increase

Nothing surprising in Thursday morning's earnings report - and frankly it does "not matter" right now because as we all know, potash = oil, at least in hedge fund's eyes. The analysts finally seem to be somewhat catching up to the earnings potential. They only missed by 30 cents this time around after being wrong by a few miles for quarters on end [Oct 23: Analysts Still Doubting the Fertilizer Stocks]. As with last quarter, I urge anyone considering this sector to read the Potash (POT) earnings report because it is almost like an industry analysis each quarter.

I won't copy the whole thing but have a few key points below. 220% year over year earnings growth and an astounding 62% sequential growth rate. With its relatively fixed cost model, gross margin (dollars) in the 1st half of 2008 have already surpassed all of 2007. And Mr. Doyle is defending the stock (like he needs to) with share purchases. In the long run, after the growth rates slow down in these stocks they will be cash flow machines spitting off oodles of dividends. I need to reinforce 2 things: #1 despite the name, Potash has its hands in all 3 nutrients and #2 despite the fuss in the media or hedge funds, this company is sold out of all production and basically on "allocation" which means it is parceling out product because demand is higher than supply. Last, notice the input costs and keep in mind who has the most vertical integration in the industry versus who does not.

But again, until hedge funds make oil their plaything I guess none of it matters. We'll continue to stick in sectors that have the best fundamentals and await the return of the hundreds of billions of dollars after it is done milking the bank trade.

• Potash Corporation of Saskatchewan Inc. (PotashCorp) today reported record second-quarter earnings of $2.82 per share(1) ($905.1 million), a 220 percent increase over the $0.88 per share ($285.7 million) earned in last year's second quarter.
• This represents the highest quarterly earnings in company history - 62 percent above the record $1.74 per share ($566.0 million) set in first-quarter 2008 - and reflects rising global fertilizer demand and the impact of significantly higher prices for potash, nitrogen and phosphate products.
• First-half gross margin reached $2.3 billion, compared to $871.1 million in the first six months of 2007, and has already exceeded the record full-year total of $1.9 billion set last year.
• Cash flow from operating activities prior to working capital changes(2) reached $1.1 billion for the quarter and $1.7 billion for the first six months of 2008, compared to $473.7 million for the second quarter of 2007 and $756.7 million for the first half of that year.
• This strong performance was enhanced by our offshore investments in Arab Potash Company Ltd. (APC) in Jordan, Sociedad Quimica y Minera de Chile S.A. (SQM) in Chile, Israel Chemical Ltd. (ICL) in Israel and Sinofert Holdings Limited (Sinofert) in China, which added $94.0 million to our before-tax earnings in the quarter.

Discussion of various nutrients 

• The resulting tight fertilizer supply/demand fundamentals impacted all three nutrients in the quarter, and were clearly evident in higher product prices. First, in potash, inventories were reduced to historically low levels around the world. For example, reported North American producer inventories were 41 percent below the previous five-year average at the end of June, an extremely low level given upcoming summer maintenance shutdowns. Global demand remains unsatisfied, even without considering the protracted contract settlements that left China approximately 3 million tonnes short of previously expected 2008 potash requirements.
• Global nitrogen and phosphate supply was impacted in the second quarter by China, the world's largest urea exporter and second-largest phosphate exporter in 2007. China introduced a 35 percent tax on phosphate and nitrogen exports during the first quarter to protect its domestic supply, and then raised it to 135 percent effective from April 20 to September 30, 2008. Phosphate supply tightened further in May when a severe earthquake struck Sichuan Province, which produces 11 percent of China's phosphate rock and a significant amount of related downstream fertilizer, feed and industrial products.
• In nitrogen, while higher global costs for oil and natural gas supported higher product prices and generally restricted product movement to regions relatively close to the source of production, the Chinese export tax immediately and significantly drove world urea prices higher.

Input cost data 

• Phosphate producers without an integrated supply of phosphate rock continued to be affected by rising costs for key inputs. The price of rock from Morocco rose to $350-$400 per tonne, compared to $190 in the first quarter of 2008 and $56 in last year's second quarter.
• Delivered sulfur prices rose to $800 per tonne or higher in China and India, while US molten sulfur prices increased $200 per long ton from the first quarter of 2008.

Share buyback 

• As previously disclosed in January 2008, the Board of Directors authorized a share repurchase program that allows PotashCorp to buy back up to 15.8 million shares over the course of one year. Prevailing stock market conditions in the second quarter provided an opportunity to accelerate the buyback. We purchased 7.5 million shares for cancellation in the second quarter, in addition to the 3.4 million shares repurchased in the first quarter. By the end of the second quarter, we had purchased approximately 10.9 million shares under the repurchase program at a cost of approximately $2 billion.

Guidance Raised 

• PotashCorp is raising full-year net income guidance from $9.50-$10.50 per share to $12.00-$13.00 per share. We expect third-quarter net income to be in the range of $3.25-$3.75 per share. (vs analysts $3.27 Q3 and $11.67 for full year)

This is only about 20% of the data available in the earnings report - worth a full read.

Once again, can't do much about the stock price performance; I am old fashioned and assume buying the best stocks eventually lead to profits but in this market I am considered an old fogy advancing such concepts. I continue to believe earnings potential has been underestimated by the market as I've been saying for the past year. Another raised guidance shows analysts and the market are still behind the ball. These growth rates cannot continue forever, but again - in the long run these will shift to slower growing but massively profitable cash flow machines.

But for now the stocks are not in favor. 

Disclosure: Author is long Potash in fund; no personal position.

Comments

[johnthebear]

WOW

[DAD08]

Great Post with facts to corroborate statements. This pullback represents an UNBELIEVABLE opportunity for those who want to make money on the long side. For those who think this group and POT are too expensive -- buy banks!! but BEWARE-- the fertilzer stocks trade at arguably the lowest forward PE's in the entire market!!
The Stocks to own- POT, MOS, AGU, CF, SQM
Get LONG.

[Wez]

You said it all....great company wrong time. As I said on your blog, POT up 1800% over the last 5 years is begging for a little reversion to the mean. Great article though.

[will]

Doesn't matter what Potash did, the criminals ( and I mean criminals) sold it off like it was Crox. Potash, based on their ER, should have been over 250 today, but the criminals ( hedgies/naked shorts,) held it down, sold it off, and stole money from the retail investor. This has got to STOP. People should be thrown in jail for this obvious manipulation and whats even more criminal is that Potash let them get away with it! BIDU, ISRG, QCOM, all up 20% couldn't touch the numbers Potash delivered! Where's the SEC? Where's the law? Where's Bill Doyle letting these crimes go on? This is what our American Financial System has become a playground for criminals that steal money from retail investors even if the likes of Potash deliver INCREDIBLE NUMBERS! What a friggin DISGRACE. 192 when it should be at 250 and nobody gives a damm about the crooks, not even Bill Doyle.

[AtlanticAve]

I agree with you, Will. However, the overall Market got sucker-punched today...so hopefully the fert. companies will come back tomorrow with a vengeance. Medium and long-term they will be fine.

Still, the rotation from commodities to financials has been dispiriting for those who invest in fundamentals. There's just so much blatant market manipulation. And if the retail investor gets on the wrong side of it, he/she gets steamrolled.

[Deltaxray7]

You sure could see my surprised look at 4pm when after
all those great reviews of POT, it was down almost 7%.

At least my TRA was up a tad. Kinda balanced things out flat.

But flat isn't what were looking for now is it?

[gaucho]

Shorting has become huge and will compare to 1929 when the paper hangers flooded the market with fake paper and spawned the crash. Another company I invest in is called CALM has 125% of its shares shorted. The hedge funds have huge media influence and have people who do nothing but post denials about naked shorting. They label people who claim that it is occurring crack pots, conspiracy theorists, and people that do not want to admit that their stock is a dog. Who are you going to believe your lying eyes or the financial media? Only problem for the Hedge funds is that Cox let the cat out of the bag and caused a huge increase in the financials. So it is now virtually impossible to claim the Naked shorting doesn’t exist especially when Cox says so and the SHO list exists.

Well CALM and POT are definitely not in his class yet they have a huge short presence.

THis is a must listen for stock market investors.
www.financialsense.com...

You may want to take all your money out of the market!

[AtlanticAve]

Gaucho, where are you getting your info about the short presence on CALM and POT? According to shortsqueeze.com, POT only has 1.3% of it's shares sold short, and MOS (my other fave ag. stock) only has 1.7%.

While I do agree that the naked shorting is appalling and criminal...I'm just wondering where you are getting your figures.

(As a point of reference, UAUA has 25% of it's shares sold short! Which makes sense, frankly.)

[windinmyface2]

Pot should have gone throught the roof today? I guess we will have to wait for next week.

[theoilyboy]

why does POT not raise its dividend?

[b-diddy]

I don't understand how slightly lower corn prices is supposed to equal less fertilizer demand? If I were a farmer, lower crop prices means BUY MORE fertilizer to try to keep up my income level. The demand is still there to buy all of the crops farmers can grow so they will keep buying fertilizer as much as they can. A suspension of the ethanol mandate will INCREASE the amount of fertilizer demand because of the temporary corn price reduction it would cost. All Ag stocks will return to normal, the hedge funds are just waiting to get them as cheap as they can as the retail investor panics and sells. I am going to keep buying and buying and buying the lower it goes.

[flyingdutchman]

Did you all catch the news of the strike notice given to POT by it's union? This may help explain some of the reluctance in sp movement. The company was handed 48 hr strike notice two days ago. Its another uncertainty along with the perceived short term pull back in demand.BMO states that it will not be resolved quickly unless the company agrees to the unions demands.

[robert1938]

ZOMG MY STOCKS R DOWN IT MUST BE EEVIL SHORT SELLARS DOING IT!!!

Get a grip.... The markets can be very irrational in the short term, but short sellers have NOTHING to do with a company's long term success if management does what they are supposed to do.