We believe this week's S&P Focus Stock, Potash Corp. of Saskatchewan (POT; recent price, 180) has an extremely strong earnings per share (EPS) outlook combined with a compelling stock valuation. In 2009, we look for the sixth consecutive year of record EPS, driven by robust fertilizer markets and higher prices. The stock carries Standard & Poor's highest investment recommendation of 5 STARS, or strong buy.
Potash is the world's largest integrated fertilizer company, including the largest global producer of potash with 22% of global capacity. Increased global fertilizer demand is being driven by population and economic growth in emerging economies such as China and India, which is resulting in improving standards of living and diet and boosting the need for food and animal feed. We believe crop plantings will rise in 2009, including an increase in U.S. corn acre plantings, as a result of near-record grain prices and historically low grain inventory-to-use ratios. This has given fertilizer producers extraordinary pricing power for the key nutrients—potash, phosphate, and nitrogen—required by farmers to boost crop yields.
The stock is quite volatile, with a rapid runup over the past four years, peaking in mid-June before a sharp pullback in recent weeks along with the energy, commodities, and grain prices. However, grain prices remain higher than a year earlier.
Company Profile and Outlook
As the world's largest integrated fertilizer company, Canada-based Potash Corp. produces all three of the key plant nutrients—potash, phosphates, and nitrogen. By our analysis, fertilizers accounted for about two-thirds of its sales in 2007, with industrial and animal feed products accounting for about one-third.
Potash
The company is the largest global producer of potash (34% of sales and 49% of gross profits in 2007). In 2007, it produced a record 9.2 million metric tons in Canada from six mines in Saskatchewan and one in New Brunswick, accounting for 17% of global production. It sold 9.4 million tons in 2007, with offshore (outside North America) markets accounting for 63% of shipments. We expect sales volume in 2008 to be a record 10.1 million tons, followed by about 11 million tons in 2009, driven by increasing export shipments. Both the potash industry and Potash Corp. have been operating essentially at capacity this year, and the company reports it has customers on supply allocation. North American potash industry inventories at the end of July 2008 were below the year-earlier level as well as 35% below the five-year average.
Robust markets and tight capacity have given fertilizer makers extraordinary ability to raise prices. The potash industry has announced a series of domestic price hikes totaling more than $600 a ton since early 2007, with the majority being effective this year, bringing the list price to $767 a ton beginning in September. The company's average realized North American price was $403 a ton in the second quarter, up from $182 in the 2007 period and $301 in the first quarter of 2008. Export price hikes have been just as large with prices in Latin America, Brazil, and Southeast Asia at $1,000 a ton for the fourth quarter. Prices at the beginning of 2008 were at $405 a ton for Brazil and $425 to Asian customers. In April, China, the largest foreign customer for Canadian producers, signed an annual contract for 2008 at $576 a ton (before shipping costs), up $400 from 2007. As a comparison, the company's offshore price in the second quarter averaged $417 a ton, up from $143 in the 2007 period.