Potash Corp. of Saskatchewan Inc.
/ (POT-NYSE)We are upgrading our recommendation on Potash Corporation to Neutral following its better-than-expected first quarter results. Adjusted earnings topped the Zacks Consensus Estimate. Sales fell year over year but beat expectations. Lower pricing across all three nutrients dragged down the bottom line in the quarter. The companymodestlyraised its earnings and potash sales volume forecasts for 2014 factoring in stability in the potash market. Potash Corp. is exposed to volatility in potash and phosphatepricing.Moreover,demand for potash and phosphatestill remains somewhat weak in India, a key market. Nevertheless, Potash Corp. will benefit from expanded operational capability. It is also expected to gain from a healthy demand environment in North America in 2014.
/ Equity Research / POT | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 05/30/2014
Current Price (05/29/14) / $36.40
Target Price / $38.00
SUMMARY
/ Equity Research / POT | Page 1SUMMARY DATA
52-Week High / $42.4852-Week Low / $28.91
One-Year Return (%) / -9.63
Beta / 1.01
Average Daily Volume (sh) / 4,057,173
Shares Outstanding (mil) / 860
Market Capitalization ($mil) / $31,304
Short Interest Ratio (days) / 5.13
Institutional Ownership (%) / 61
Insider Ownership (%) / 3
Annual Cash Dividend / $1.40
Dividend Yield (%) / 3.85
5-Yr. Historical Growth Rates
Sales (%) / 10.8
Earnings Per Share (%) / 10.6
Dividend (%) / 83.4
P/E using TTM EPS / 19.9
P/E using 2014 Estimate / 22.1
P/E using 2015 Estimate / 17.8
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Fertilizers
Zacks Industry Rank * / 99 out of 267
OVERVIEW
The Potash Corporation of Saskatchewan Inc., a Canadian corporation based in Saskatoon, Saskatchewan, is the world's largest fertilizer enterprise producing three primary plant nutrients – potash, phosphate andnitrogen. The government of Saskatchewan founded the company in 1975. In 1989, it became a publicly traded company and the government of Saskatchewan divested its shareholding.
During the 1990s, Potash Corp. expanded by buying a number of American potash companies including the Potash Company of America, Florida Favorite Fertilizer, Texasgulf and Arcadian Corporation. On the basis of capacity, Potash Corp. is the world’s largest integrated fertilizer and related industrial and feed products company. It is the largest producer of potash worldwide by capacity. Moreover, Potash Corp. is the third largest producer of phosphates globally by capacity and is the third largest nitrogen producer worldwide by ammonia capacity.
The company owns and operates five potash mines in Saskatchewan and one in New Brunswick. It also holds mineral rights to the Esterhazy mine, where potash is produced after a mining and processing agreement with a third party.
Potash Corp.’s North Carolina facility is the world’s largest integrated phosphate mine and processing plant. The company has a phosphate mine and two mineral processing plant complexes in northern Florida and six phosphate feed plants in the U.S. It can produce a variety of phosphate products at its Geismar, Louisiana facility.
The company’s nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. It has nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad.
Potash Corp. generated sales of $7,305 million in 2013 with potash, nitrogen and phosphate products accounting for 41%, 31% and 28%, respectively.
REASONS TO BUY
With more than half of the world's estimated new supply coming from its projects between now and 2015, Potash Corp. believes that it can capture a significant share of demand growth over the next several years. This expanded operational capability gives Potash Corp. a competitive advantage. The company is better prepared to meet the needs of its customers, its employees, suppliers and communities, and to deliver strong performance and exceptional returns for its shareholders.
While there is uncertainty surrounding the U.S. economy and the sovereign debt situation in a number of European countries, the strain on the world's food supply is driving strong demand for all three nutrients of the company, especially potash. Due to tight potash supply in North America and Latin America, the demand for potash is expected to rise as potash buyers are now seeking to secure the product. The company expectsglobal potash shipments in the band of 55 million to 57 million tons for 2014. It sees a strong recovery in potash demand in North America this year.
Potash Corp. has a competitive advantage stemming from its mining rights to the world’s largest potash reserve. The company has a strong geographic diversification as most of the potash is sent offshore. Moreover, Potash Corp. continues to invest in expanding its operational capability in potash.
Potash Corp. is expanding its operations in the New Brunswick plant. Once completed, the mining facility is expected to be ramped up by 2015. When fully ramped up, the facility will replace the existing underground operation and is forecasted to have an operational capacity of 1.8 million tons a year.
Potash Corp. remains committed to boost returns to its shareholdersbased on its ability to generate strong cash flows. The company repurchased 11.7 million shares during the most recent quarter and completed around 60% of its expected total repurchases under the program at the end of the quarter.
REASONS TO SELL
Potash Corp. is seeing somewhat weak potash demand in India, a key market. Indian government’s move to trim potash subsidy levels coupled with higher retail pricing and local currency devaluation may continue to lead to depressed demand in the country. Adding to the problems is declining crop yields. A material recovery in demand is not expected in the near term. The company also remains exposed to a volatile pricing environment. Average realized potash price fell roughly 31% year over year in the most recent quarter on lower realizations. Pricing pressure is also witnessed acrossnitrogen and phosphate segments due to weak market fundamentals. These challenges may sustain in second-quarter 2014.
Potash Corp. remains affected by macroeconomic uncertainties and is exposed to other issues such as price volatility and currency exchange fluctuation. While need for potash is significant in major developing nations like China and India in the long run, a number of short-term challenges across these key markets may impact the near-term demand for fertilizers.
Potash Corp. and other fertilizers and agricultural chemicals makers face significant challenges following the exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (BPC). Uralkali’s Board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. BPC is one of the two largest cartels (along with North America’s Canpotex) that influence potash pricing by controlling the production and supply. Uralkali’s game-changing move has put pressure on potash prices as well as on fertilizer makers.
Operating facilities at full capability can be a challenge for the company due to disruptions from logistical, operational and geopolitical issues. While Potash Corp. estimates that global demand for potash will be higher in 2014 than last year, the ability to meet this anticipated increase in demand is a function of the industry’s capacity to produce.
RECENT NEWS
Potash Corp.'s Earnings Beat but Profit Down– April24, 2014
Potash Corp. posted lower profit in the first quarter of 2014 due to lower realizations in all three nutrient segments. Profit for the reported quarter slid roughly 39% year over year to $340 million or $0.40 per share from $556 million or $0.63 per share a year ago.
The reported profit included $0.06 per share special dividend from the company’s investment in Israel Chemicals Ltd. (ICL) as well as $0.04 per share non-cash impairment charge related to its investment in Sinofert Holdings Ltd.
Barring one-time items, Potash Corp. posted earnings of $0.38 per share, exceeding the Zacks Consensus Estimate of $0.35.
Revenues for the quarter fell roughly 20% year over year to $1,680 million, but beat the Zacks Consensus Estimate of $1,548 million.
Gross margin fell 35% to $565 million in the quarter from $867 million recorded in the comparable prior-year period.
Segment Review
Potash: Sales volumes rose roughly 4.5% year over year to around 2.3 million tons in the reported quarter led by strong buyer engagement. Sales volumes rose in North America as the company leveraged its extensive warehousing and distribution capabilities to meet strong demand. Sales volumes however fell offshore in the reported quarter as delayed Chinese and Indian contracts and rail constraints limited shipments. Average realized potash price was $250 per ton, down 31.1% from the prior-year quarter.
Nitrogen: Sales volume rose 6.7% to 1.6 million tons from 1.5 million tons a year ago, benefiting from strong operating rates across all of its nitrogen facilities and the benefit of a full quarter of production at the company’s Geismar ammonia plant. Average realized prices for nitrogen products decreased 21.1% to $344 per ton due to weaker market fundamentals.
Phosphate: Sales volume of 0.8 million tons was up 11.1% year over year. Average realized phosphate price was down 11.8% year over year to $484 per ton. Weaker fertilizer market conditions through the second half of 2013 weighed on the company’s first-quarter realizations.
Financials
Potash Corp. exited the first quarter with cash and cash equivalents of $533 million, down 9.8% year over year. Long-term debt rose roughly 7% year over year to $3,709 million.
Capital-related spending was $224 million during the reported quarter compared with $496 million in the year-ago quarter as spending related to Potash Corp’s multi-year potash expansion program neared completion.
Outlook
Potash Corp. increased its annual estimate for gross margin for potash to $1.1–$1.3 billion and sales volumes to 8.3–8.7 million tons based on slightly improved potash pricing and demand outlook.
For nitrogen, the company believes that typical seasonal trends will result in slightly weaker margins through the second half of 2014, although higher sales volumes expectations should partly offset this impact. For full-year 2014, the company expects total gross margin to remain historically high but lag 2013 levels.
For phosphate, the company expects prices for all products to be below those of 2013. Potash Corp. remains concerned by the weaker weather conditions. The planned closure of a chemical plant at the company’s White Springs operation is expected to result in slightly lower sales volumes in the second half of 2014 and keep its non-cash costs elevated.
The company raised its annual estimate of income from offshore investments to a range of $230–$240 million to include the special dividend received from ICL during the first quarter.
Potash Corp. also adjusted its full-year 2014 earnings guidance to $1.50–$1.80 per share, which includes second-quarter net income in the band of $0.40 to $0.45 per share.
Potash Falls on Lower Profit, Earnings Miss– January30, 2014
Potash Corp logged lower profit in fourth-quarter 2013 and its earnings missed expectations, hit by challenging fertilizer market conditions. The company’s shares fell as much as 5.5% in the trading session following the earnings announcement.
Potash Corp.’s profit for the reported quarter slid roughly 45% year over year to $230 million or $0.26 per share from $421 million or $0.48 per share a year ago. Charges related to headcount reductions and weaker prices for all three nutrients – potash, nitrogen and phosphate – dragged down the bottom line.
Potash Corp., in Dec 2013, said that it will cut roughly 18% of its workforce across Canada, the U.S. and Trinidad (affecting more than 1,000 positions) and execute other operational changes including plant closures and capacity cuts.
Barring severance-related charges associated with workforce reductions, earnings of $0.31 per share fell short of the Zacks Consensus Estimate by $0.02.
Revenues for the quarter fell roughly 6% year over year to $1,541 million, yet topped the Zacks Consensus Estimate of $1,388 million. Sales fell as higher sales volume was more than neutralized by lower pricing.
Gross margin fell 22% to $460 million in the quarter from $586 million recorded in the same period last year. A weak fertilizer market hurt gross margin in the quarter.
For full-year 2013, profit fell 14% year over year to $1,785 million or $2.04 per share. Adjusted earnings of $2.09 per share missed the Zacks Consensus Estimate of $2.12.
Revenues for the year fell roughly 8% year over year to $7,305 million, but beat the Zacks Consensus Estimate of $6,880 million.
Segment Review
Potash: Sales volumes jumped roughly 34% year over year to around 1.77 million tons in the reported quarter. Sales volumes rose both in North America and offshore in the reported quarter. Average realized potash price was $282 per ton, down 27% from the prior-year quarter, impacted by competitive pressure across all markets.
Nitrogen: Sales volume rose 37% to 1.5 million tons from 1.1 million tons a year ago, benefiting from expanded capacity. Average realized prices for nitrogen products decreased 29% to $326 per ton due to decline in prices for all major product categories.
Phosphate: Sales volume of 0.9 million tons was up 11% year over year. Average realized phosphate price was down 21% year over year to $455 per ton, attributable to decline in prices for fertilizer products as well as feed and industrial products. The phosphate market was hit by weak Indian imports during 2013.
Financials
Potash Corp. exited 2013 with cash and cash equivalents of $628 million, up 12% year over year. Total debt fell roughly 4% year over year to $3,937 million.
Capital-related spending was $0.4 billion during the reported quarter, bringing the company’s total expenditure for the full year to $1.6 billion. Potash Corp. repurchased 7.8 million shares during the fourth quarter and completed around 33% of its expected total repurchases under the program at the end of 2013.
Outlook
Potash Corp. expects fundamental drivers of fertilizer demand to remain in place in 2014 amid a weak pricing environment.
For potash, the company anticipates global demand to improve in 2014 and expects shipments in the range of 55-57 million tons for the full year, up roughly 5% year over year.
Potash Corp. expects earnings for first-quarter 2014 to be in the range of $0.30 to $0.35 per share. For 2014, earnings are expected in the band of $1.40 to $1.80 per share.
Potash Corp. expects sales volume for 2014 in the range of 8.2-8.6 million tons factoring in the benefit from an expected increase in global shipments, partly masked by lower sales from its New Brunswick facility.
In nitrogen, the company expects sales volumes to surpass 2013 levels on the back of full-year production from its Geismar, La., facility and expected lower natural gas curtailments at Trinidad operations.
For phosphate, Potash Corp. sees stable margins in 2014 vis-à-vis 2013 as anticipated weak pricing will be neutralized by better efficiencies and a shift to a more favorable product mix. While closure of a chemical plant at White Springs is expected to modestly reduce production during second-half 2014, the impact is not expected to lead to significant sales volume reductions for the full year.
Gross margin for potash is expected in the range of $1-$1.3 billion, while for nitrogen and phosphate it has been forecast in the band of $1-$1.2 billion for 2014. Capital spending for 2014 is expected to be roughly $1.1 billion.
While Potash Corp. is well placed to achieve its potash cost reduction goal of $15-$20 per tons from 2013 levels, it expects a $16 million increase in non-cash costs in 2014 due to higher depreciation at its Penobsquis mine in New Brunswick and transition costs of roughly $54 million associated with the ramp-up at Picadilly and Rocanville.
VALUATION
Potash Corp.’s current trailing 12-month earnings multiple is 19.9X, compared to the 25.2X average for the peer group and 17.8X for the S&P 500. Over the last five years, the company’s shares have traded in a range of 10.9X to 33.9X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on the estimated earnings for 2014. Our Neutral recommendation on the stock indicates that it will perform in line with the market. Our price target of $38 is based on 23x our 2014 earnings estimate.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of POT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1079 companies covered: Outperform - 16.7%, Neutral - 76.6%, Underperform – 5.7%. Data is as of midnight on the business day immediately prior to this publication.