Potash Corp (NYSE: POT) Slashes Q2 Earnings Est; Group Holding Up Surprisingly Well
Posted on | June 26, 2009 Time: 9:57 am |
Potash Corp of Saskatchewan Inc (NYSE: POT) issued a major cut to 2nd quarter earnings estimates yesterday, now calling for just $.70/share from earlier guidance of $1.10-$1.50. While this is certainly disappointing for investors in the entire space, shares of Potash Corp. are impressively holding their own today, currently down just 2% after falling nearly 10% in the after-hours sessions last night.
A similar warning from German producer K+S AG came out 10 days ago, triggering a 20% selloff in the major producers such as POT, Agrium (AGU), and Mosaic (MOS). The issues stated then are the same used by POT CEO Bill Doyle yesterday; slumping demand and falling realized prices for its core fertilizer minerals.
As Potash Corp. is the second-largest holding in the Secular Trends Portfolio, I am frustrated at management’s delay in getting to the table on the earnings cut. It seems clear to me that as the alpha dog of the group, Potash Corp. was trying desperately to cut some last minute deals to secure their volume intentions for the quarter.
Management Needs to Step Up
But despite earning my deadly “wag of the finger”, there is little change to my long-term thesis on the company. My faith in management, however, has been bruised, and I see some major shakeups happening to the group marketing strategy employed by the major North American producers (via Canpotex).
The Eastern Hemisphere equivalent of Canpotex, Belarusian Potash Co. (BPC) - composed of major Russian and you guessed it, Belarusian producers - has already caved in on the standard operating “wink wink” agreement with Canpotex to hold the line on major deals with buyers from China, India, and South America. Their desire to get what they can, right now, has forced Canpotex to follow suit and realize lower prices on high volume deals.
This has resulted in the price of potash dropping considerably from the record $900-$1000/tonne deals we saw even at the outset of 2009. Given that potash could be bought just two years ago for about $200/tonne, this type of thing was inevitable in such a weak global economy. Mgt at Potash needs to wake up and realize they can’t be the sleepy, cozy Canadian purveyors (must come naturally?) of the world’s largest supply of the soil-enriching mineral.
Second Half Prospects and Beyond - A Quick Industry Snap
Separate news reports from Potash Corp. and other producers hint at the fact that the old process of locking up multi-year deals with major buyers could be set to pasture this year. The company seems willing to contend with the vagaries of spot prices in the hopes that the supply/demand balance will settle in the 2nd half of the year and pinch the Chinese and others into believing that somewhere between $500-$700/tonne is going to be the new normal.
Potash Corp has already cut production by nearly half - over 4.7 million tonnes from peak capacity of ~11 million - in an attempt to meet ‘hunched-over’ demand. Because more so now than in any year in our lifetime, in 2009, any purchase that can be put off will.
The plus side of this whole convoluted equation is that the arable land being neglected with minerals this year will produce a little bit less than everybody hopes, resulting in (my prediction here) higher ag prices throughout the remainder of the year. This will spur larger purchases heading into 2010, especially from Brazil, India, and other nations that will get religion on the fact that agriculture is just as valuable a resource as iron, aluminum, or gold. Ok, maybe not gold, but you get the picture. More of my analysis and thesis can be found here and here.
BHP on the Horizon
BHP has puppy love
I’ve read several recent reports that BHP Billiton has a major crush on potash producers in North America as they look to become the Wal-Mart of mining. Should the Australian giant step in and buy some of the smaller Canadian producers, it would cause a major shake-up in the industry. I’m 100% positive that BHP would have no problem going out on their own to negotiate deals for tiny profit margins, which would probably break up Canpotex in about a week. I would view this favorably, as I just don’t see these negotiating/marketing groups being the key to Potash Corp’s future.
In the meantime, Potash Corp will likely only earn $5-7 per share in 2009, crimping their multiple considerably from the headline 9-10x that you’d see listed on most quotes. But this is just the nature of cyclicality. Intel and Texas Instruments routinely trade for P/Es of anywhere between 60x and ? during their down cycles, and institutional investors are smart (sic?) enough to realize that this is a temporary phenomenon. At least we hope so…
Ryan Barnes
disclosure: Author does not hold a postition in the companies mentioned; POT is held in the Secular Trends Model Portfolio
Tags: Agriculture > Agrium > Potash Corp
Comments
About
Pragmatic commentary on U.S. & global investing, demographics & secular trends, and the valuation of anything worth valuing. Objective, unbiased research; We believe in minimal design, zero gimmicks, and maximum results.
Subscribe to feed
Search
Secular Trends Holdings
- Secular Trends Portfolio Real-Time Positions
- The Fuel That Fed the Subprime Meltdown (Written in September 2007)
- Performance Studies on the DJIA & Fundamental Value Stocks (11/22/08)
- Las Vegas Sands - Are They Sustainable in 2009? (Published 11/15/08)
Older Posts That Folks Seem to Like
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 2.0 Generic License.