Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) is down more than 40% in the past 12 months, and investors are wondering if the stock has finally found a bottom.
Let’s take a look at the fertilizer giant to see if it deserves to be in your portfolio today.
Perfect storm
Potash Corp. has been hit by a perfect storm of unfortunate events over the past few years.
Prices started falling in 2012, but the plunge really picked up speed in 2013 when two of the industry’s largest producers based in Russia and Belarus decided to end their marketing arrangement.
The split caused an immediate 25% drop in potash prices and created a nasty battle for global market share that continues to put pressure on margins.
Other factors have made the situation worse.
Low crop prices have put U.S. fertilizer buyers on the sidelines. In India, drought conditions have forced the country to reduce its potash purchases.
Volatile moves in currency rates are also causing grief. Brazil’s real has fallen 50% against the U.S. dollar in the past five years, making potash more expensive for the country’s agriculture industry.
If that weren’t enough, additional pressure is being applied by China and India. The two countries normally have their annual wholesale deals in place by February and April. This year, the agriculture giants have yet to sign an agreement with global producers, and that is keeping buyers in other countries out of the market because the prices negotiated by China and India often set the benchmark for the entire sector.
Effects on Potash Corp.
Potash Corp. is doing a good job of navigating the downturn. The company shut down two facilities in New Brunswick earlier this year and reduced output at plants in Saskatchewan.
Management also reduced the dividend.
In the Q1 2016 earnings statement Potash Corp. reported earnings of US$75 million, or $0.09 per share. Full-year earnings guidance was lowered to US$0.60-0.80 per share, so the current annualized dividend payout of US$1.00 per share looks a bit high.
Outlook
Potash Corp. put on a brave face when it reported the first-quarter results and said conditions are expected to improve in most markets through the second half of 2016.
In the latest update the company said global potash shipments are expected to be 59-61 million tonnes in 2016, about in line with the results for the past two years. Roughly seven million tonnes of potash production capacity is expected to be shut down due to mine depletion and economic conditions over the next four years, and that should offset new capacity that’s scheduled to hit the market over the same time period.
Prices for some crops, such as soybeans, are already beginning to recover, and that could motivate farmers to open their wallets in the coming months.
Should you buy?
The long-term outlook for the fertilizer space is positive as food demand is expected to rise significantly in the coming decades. Potash Corp. is a low-cost producer and is wrapping up a multi-year capital program, so the business is well positioned to benefit when the sector finally recovers.
There probably isn’t a rush to buy the stock today, and investors who step in now should consider the 6% dividend a bonus. Nonetheless, contrarian types might want to start nibbling as the long-term potential gains likely outweigh the downside risk at this point.
