We don't usually think of companies like Potash Corporation of Saskatchewan (TSX-POT) as bargain stocks. But about a year ago Russia's Uralkali quit one of the world's two big potash cartels precipitating a world-wide price war for this vital crop nutrient and driving down the share prices of companies that produce it.
But Saskatoon-based PotashCorp has been recovering and since March its shares have gone up by 4.5 per cent. That's because the company's outlook is improving. It remains a buy for long-term share price gains and dividends that yield an attractive 3.8 per cent.
PotashCorp produces the three essential nutrients needed to help farmers grow more abundant crops. It says that it's "the largest producer, by capacity, of potash and one of the largest producers of nitrogen and phosphate". The company continues to face the impact of somewhat low prices for fertilizers. But it's doing better than expected.
In the second quarter, for instance, PotashCorp earned 56 cents a share (all figures in U.S. dollars). This was well above the market's consensus earnings estimate of 44 cents. PotashCorp writes that its earnings beat the top end of its second-quarter guidance range. This was thanks to strength in potash and nitrogen.
PotashCorp expects to recover somewhat
President and chief executive officer Jochen Tilk said, "Performance in all three nutrient segments improved from the beginning of the year. ... Although results were below those of the same period last year, an improving price environment and-in the case of our potash and nitrogen businesses-cost efficiencies contributed to our bottom line [profits]." In the first quarter, bad weather hurt shipments.
Based on its better-than-expected second quarter results, PotashCorp has raised its sights. It now expects to earn from $1.70 to $1.90 a share in 2014. Earnings per share will benefit from three initiatives.
First, PotashCorp spent $1.065 billion to buy back 29,200,892 of its shares in the first half. This was only slightly offset by the issuance of new shares for $30 million. With the earnings spread over fewer shares, earnings per share rose.
Second, PotashCorp is cutting its costs. It claims to "remain on track to achieve our 2014 target of reducing per-tonne cash costs by $15 to $20?EUR? compared to 2013 levels. Lower costs, of course, can assist in raising the company's earnings.
Third, PotashCorp has trimmed its capital spending. As the producer with the most capacity, it can afford to cut back on investment. The company can wait for demand to rise in the years ahead before investing to bring new capacity on stream.
In the first half, PotashCorp earned $812 million, or 95 cents a share. This was down by nearly 30 per cent from earnings of $1.199 billion, or $1.37 a share, a year earlier. Earnings per share fell less than total earnings thanks to the share buybacks.
PotashCorp writes, "We move into the second half of 2014 with an improved outlook for the balance of the year." It expects higher shipments of potash to produce gross margin of $1.2 to $1.4 billion. "In nitrogen, we have increased our expectation for gross margin through the balance of 2014 and now see the potential for our full-year results to approach record levels. ...We see phosphate markets staying relatively firm in the second half, assuming the emergence of more robust Indian import demand." PotashCorp long-term prospects are even better.
Solid long-term prospects
The fact is PotashCorp nutrients enable farmers to grow healthier and larger crops. That's important because the world needs more food than ever. Stockpiles of food are shrinking as demand continues to increase.
Hundreds of millions of people in the developing world are emerging from abject poverty. This gives them the means to eat larger meals more often. At the same time, the world's population keeps increasing. This means that the demand for food-and PotashCorp production-will keep rising for years to come.
The Investment Reporter, MPL Communications Inc.133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846