Thursday, July 24, 2008

Potash (POT) - The Beat Goes On

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Nothing surprising in this 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 fogie 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.

Long Potash in fund; no personal position


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