Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) looks like it might have bottomed out, and investors are wondering if this is the right time to buy the stock.
Let’s take a look at the current situation to see if the fertilizer giant deserves to be in your portfolio.
Weak prices
Potash prices have been on a downward trend for most of the past five years, but stabilization in recent weeks suggests the market might finally be ready to reverse the trend. The crop nutrient currently trades for about US$240 per tonne on the spot market, roughly half the price Potash Corp. received in 2011.
What’s going on?
A number of factors are contributing to the difficult conditions.
The bloodbath really picked up steam back in 2013 when major producers in Belarus and Russia decided to end a cozy marketing partnership. The split resulted in a flood of supply and launched a global market-share battle that continues today.
Some pundits speculate the two will bury the hatchet and re-form the cartel, but that hasn’t happened, and there is little evidence to suggest it will occur anytime soon.
China and India issues
China normally signs its annual wholesale supply contracts with global potash producers in January, and India often has an agreement in place by April. This year neither country has yet to sign a deal, and that has put pressure on the market.
Agreements are expected in the coming weeks, but observers are concerned a lower-than-expected price could hit the stocks of producers. The Chinese price normally sets a floor for spot prices in the U.S. and Brazil.
Crop prices and currency woes
To make things worse, low crop prices have forced U.S. farmers to cut back on fertilizer orders, and plunging currencies in countries like Brazil have made potash more expensive, despite the drop in price of the commodity, which is priced in U.S. dollars.
Potash Corp. earnings
Potash Corp. has closed mines in New Brunswick and reduced output in Saskatchewan in response to the weak market conditions.
The company also slashed its dividend earlier this year, and some analysts believe another cut is in the cards.
First-quarter earnings came in at US$75 million, or US$0.09 per share.
Management lowered the full-year earnings guidance to US$0.60-0.80 per share, so the current annualized dividend payout of US$1.00 looks a bit rich based on the latest earnings outlook.
Should you buy?
Global shipments in 2016 are expected to be 59-61 million tonnes, about in line with 2015. Spot prices are stabilizing, and Potash Corp. believes demand from U.S. farmers, India, and South America should begin to improve later this year.
The longer-term outlook is also encouraging. Fertilizer shipments are expected to grow significantly in coming years as farmers try to meet rising demand for crops. Potash Corp. is a low-cost producer and is at the end of a major capital program, so it should be well positioned to benefit when the cycle turns the corner.
I wouldn’t back up the truck just yet, and the 5.9% dividend should be considered a bonus, but contrarian types might want to start a position on further weakness in the stock. The downside risk at this point should be limited, and Potash Corp. could easily move 50% higher when fertilizer prices recover.
