Have Potash Corporation of Saskatchewan Inc.’s Shares Finally Bottomed?

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) released third-quarter earnings on October 29, and its stock has reacted by falling over 3%. Should you buy on the dip?

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Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT), the world’s largest manufacturer of fertilizer, announced mixed third-quarter earnings results before the market opened on October 29, and its stock has responded by falling over 3%.

The stock now sits more than 45% below its 52-week high of $37.60 reached back in February, so let’s take a closer look at the results to determine if now is finally the time to begin scaling in to long-term positions, or if it could head even lower from here.

Lower potash and nitrogen sales lead to weak results

Here’s a summary of Potash’s third-quarter earnings results compared with what analysts had expected and its results in the same period a year ago. All figures are in U.S. dollars.

Metric Q3 2015 Actual Q3 2015 Expected Q3 2014 Actual
Earnings Per Share $0.34 $0.37 $0.38
Revenue $1.53 billion $1.45 billion $1.64 billion

 Source: Thomson Reuters Corp.

Potash’s earnings per share decreased 10.5% and its revenue decreased 6.8% compared with the third quarter of fiscal 2014. These weak results can be attributed to sales declining in two of its three major segments, including a 3.7% decline to $548 million in its potash segment and a 17.1% decline to $462 million in its nitrogen segment, and these declines could only be partially offset by a 4.3% increase to $416 million in its phosphate segment.

Here’s a quick breakdown of some other notable statistics from the report compared with the year-ago period:

  1. Net income decreased 11% to $282 million
  2. Production of potash increased 46.7% to 2.13 million tonnes and sales volume of potash increased 8.2% to 2.18 million tonnes
  3. Average realized sales price of potash decreased 11% to $250 per tonne
  4. Production of nitrogen decreased 6.7% to 734,000 tonnes and sales volume of nitrogen decreased 7.9% to 1.43 million tonnes
  5. Average realized sales price of nitrogen decreased 10.4% to $319 per tonne
  6. Production of phosphate increased 2.6% to 442,000 tonnes and sales volume of phosphate increased 5.1% to 762,000 tonnes
  7. Average realized sales price of phosphate increased 4.1% to $538 per tonne
  8. Adjusted earnings before interest, taxes, depreciation, and amortization decreased 12.9% to $593 million
  9. Gross profit decreased 14.3% to $505 million
  10. Free cash flow decreased 38.1% to $172 million

As a result of its weak performance in the third quarter, Potash lowered its full-year outlook on fiscal 2015, now calling for earnings per share in the range of $1.55-1.65, which is down from its previous outlook of $1.75-1.95 provided in the second quarter and down from its outlook of $1.75-2.05 provided at the beginning of the year.

Is now finally the time to begin buying Potash’s shares?

It was a very weak quarter for Potash, so I think the weakness in its stock is warranted. However, I think the stock is now at, or very close to, its bottom and represents a great long-term investment opportunity today, because it trades at very inexpensive valuations and has a very high dividend yield.

First, Potash’s stock now trades at just 12.8 times its median earnings-per-share outlook of $1.60 for fiscal 2015 and only 11.8 times analysts’ estimated earnings per share of $1.73 for fiscal 2016, both of which are inexpensive compared with its five-year average multiple of 17.9 and its industry average multiple of 18.5.

At the very least, I think Potash’s stock could trade at a fair multiple of 15, which would place its shares around $26 by the conclusion of fiscal 2016, representing upside of more than 26% from today’s levels.

Second, Potash pays a quarterly dividend of $0.38 per share, or $1.52 per share annually, giving its stock a 7.4% yield, and this is significantly higher than the industry average yield of 1.9%. Investors should also note that it has raised its dividend for five consecutive years, and its ample free cash flow generation, including $851 million in the first nine months of fiscal 2015, could allow this streak to continue in 2016.

With all of the information provided above in mind, I think Potash Corporation of Saskatchewan represents one of the top turnaround plays in the market. Foolish investors should strongly consider beginning to scale in to long-term positions today.

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.

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