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.
|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.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joseph Solitro has no position in any stocks mentioned.