Potash Corp./Saskatchewan (TSX:POT)(NYSE:POT), the world’s largest manufacturer of fertilizer, announced first-quarter earnings results before the market opened on April 30 and its stock responded by falling about 1% in the trading session that followed. Let’s break down the quarterly results to determine if we should consider using this weakness to establish long-term positions, or if we should look elsewhere for an investment instead.
The weaker-than-expected results
Here’s a summary of Potash’s first-quarter earnings results compared with what analysts had anticipated and its results in the same period a year ago. All figures are in U.S. dollars.
| Metric | Reported | Expected | Year-Ago |
| Earnings Per Share | $0.44 | $0.49 | $0.40 |
| Revenue | $1.67 billion | $1.69 billion | $1.68 billion |
Source: Financial Times
Potash’s diluted earnings per share increased 10% and its revenue decreased 0.9% compared with the first quarter of fiscal 2014. The company’s very strong earnings per share growth can be attributed to its net income increasing 8.8% to $370 million, which was helped by its total costs of goods sold decreasing 8.3% and its freight, transportation, and distribution expenses decreasing 22.9%, as well as its weighted average shares outstanding decreasing 2.6% to 837.1 million.
Its slight decline in revenue can be attributed to sales decreasing 17% to $482 million in its nitrogen segment, which more than offset sales increasing 10% to $738 million in its potash segment and 4% to $445 million in its phosphate segment.
Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:
- Production of potash increased 9.1% to 2.61 million tonnes
- Production of nitrogen decreased 4.9% to 792,000 tonnes
- Production of phosphate decreased 0.8% to 366,000 tonnes
- Gross profit increased 18.1% to $667 million
- Gross margin expanded 650 basis points to 40.1%
- Operating income increased 5.3% to $559 million
- Operating margin expanded 200 basis points to 33.6%
- Income before income taxes increased 5.4% to $510 million
- Cash provided by operating activities decreased 3.3% to $521 million
- Ended the quarter with $217 million in cash and cash equivalents, an increase of 0.9% from the beginning of the quarter
Should you be a buyer of Potash today?
I think the post-earnings weakness in Potash’s stock represents nothing more than a long-term buying opportunity because it trades at attractive valuations and pays a high dividend.
First, Potash’s stock now trades at just 21.9 times its median earnings per share outlook of $1.80 for fiscal 2015 and only 18.2 times analysts’ estimated earnings per share of $2.17 for fiscal 2016, both of which are inexpensive compared with its long-term growth rate.
Second, Potash pays a quarterly dividend of $0.38 per share, or $1.52 per share annually, giving its stock a 3.9% yield at current levels. The company has also increased its dividend six times in the last four years, making it one of the top dividend-growth plays in the industry today.
With all of the information provided above in mind, I think Potash Corp./Saskatchewan represents one of the best long-term investment opportunities in the market today. Foolish investors should take a closer look and strongly consider using the post-earnings weakness to begin scaling in to long-term positions.
