The Motley Fool

Potash Corporation of Saskatchewan Inc.: A Contrarian Buy Today?

Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) continues to trade near its multi-year lows.

Let’s take a look at the current situation to see if the fertilizer giant is an attractive contrarian pick.

Market conditions

Potash Corp. recently released its market overview for global fertilizer demand.

The company said potash deliveries were strong through Q1 2017, and the rising demand is reducing the supply glut in the global market as stockpiles continue to fall.

Canpotex, the marketing company that sells the company’s potash, is actually fully committed through the end of June.

Potash Corp. estimates global potash shipments will be 61-64 million tonnes in 2017, which would be above the 60 million tonnes shipped in 2016.

Potash demand is expected to grow 2.5-3% per year over the long term. New capacity scheduled to come online over the next five years is forecast to match the demand growth. As a result, Potash Corp. says the market outlook is relatively balanced.

Spot prices have improved slightly from the 2016 lows, but the market remains under pressure.

Potash Corp. reported a Q1 2017 average realized price of US$166 per tonne compared to US$178 per tonne in Q1 2016.

Earnings rebounding

Despite the lower average sale price, Potash Corp. posted better year-over-year Q1 results. The company earned US$149 million, or US$0.18 per share, in the quarter compared to US$75 million, or $0.09 per share, last year.

Lower costs of goods sold and higher shipments offset the weaker prices.

Average costs of goods sold dropped to US$90 per tonne from US$128 per tonne in Q1 2016. Sales volumes rose from 1.8 to 2.2 million tonnes.

Agrium merger

Potash Corp. is in the process of merging with Agrium Inc. (TSX:AGU)(NYSE:AGU). The deal is expected to close in the coming months and will create a global fertilizer giant.

Agrium’s retail business should provide a nice hedge against occasional volatility in the wholesale market.

Should you buy?

The long-term outlook for the fertilizer industry is positive. Population growth is driving higher food demand, while eating up valuable farmland as urban centres expand into the countryside.

Potash prices appear to have bottomed out, and both Potash Corp. and Agrium have essentially wrapped up multi-year capital programs that have positioned them to meet future fertilizer demand as low-cost producers.

If you have a buy-and-hold investment strategy, it might be worthwhile to start nibbling on Potash Corp. while it remains out of favour.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Andrew Walker has no position in any stocks mentioned. Agrium is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.