“Agriculture is inherently an unpredictable business,” fertilizer producer Potash of Saskatchewan said yesterday, January 31, when the company reported fourth quarter earnings.
After a statement like that, investors sure weren’t expecting good news and they didn’t get it. The company reported fourth quarter earnings of 52 cents a share (excluding non-recurring items.) That was worse than the 58 cents a share expected by the Wall Street consensus. For the full year earnings fell from $3.60 a share in 2011 to $2.45 in 2012, a 32% decline. Revenue dropped 12% year over year to $1.64 billion against the $1.73 billion consensus.
And as a topper the company lowered guidance for the first quarter of 2013 to 50 cents-65 cents versus a Wall Street consensus of 68 cents share. For the full 2013 year Potash told analysts to expect earnings of $2.75-$3.25 against a Wall Street consensus of $3.20.
So what’s the problem at Potash? Read more
It’s a face off between China and India on one side and the world’s potash fertilizer producers, led by Potash of Saskatchewan (POT), on the other.
India and China have delayed regular shipments of potash fertilizer since long-term contracts expired on June 30 and March 31, respectively. That has left Asia’s two biggest consumers of fertilizer without new deliveries since the end of the third quarter and has left farmers to either buy from stockpiles or to skip applications entirely.
Negotiations with India have begun with talks with China likely in January or February. The two countries are looking for a reduction from the $490 a metric ton (India) and $470 a metric ton (China) that they paid in their last contracts. The goal, analysts say, might be a price of $400 to $430 a metric ton. Potash hit a high of $800 a metric ton in 2009.
For their part, potash producers—a concentrated group with just seven companies essentially controlling global supply—are determined to protect current prices. Some producers have reduced production in order to support prices. Potash of Saskatchewan, for example, idled four mines for eight weeks in October and November. Uralkali, the Russian company that is the world’s largest potash company by volume, plans to cut output in half between December and March.
Negotiations could drag on for a while. India still has 700,000 tons of potash in its stockpiles and that’s enough to meet demand until March. At recent rates India would then need to import 3 million to 3.5 million tons of potash to get the country’s farmers through the year.
The decisive factor, at least as far as India goes, may be a government review of fertilizer subsidies promised for March.
And it’s almost certain that India won’t agree to a deal until after that review.
I’d sell shares of Potash of Saskatchewan into this rally on the company’s lowered guidance for 2012
After the results that Potash of Saskatchewan (POT) reported on July 26, I’d use the current strength in fertilizer stocks–on soaring crop prices (because of a severe drought in the United States and elsewhere) and on the general stock market bounce on hopes that the European Central Bank will do something when it meets next week–to sell shares. Even if you continue to like the fertilizer sector—and at current valuations and with current projections of increased supply I’m not a fan—the company specific news from Potash argues that you should find another horse to ride.
With this post I’m selling the stock out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ with a 0.9% gain since I added it on April 4, 2012.
For the second quarter Potash announced earnings of $1.01 a share, a penny below the Wall Street consensus. (That’s discounting a one-time write down of $341 million on its investment in a Chinese fertilizer company.) Revenue came in at $2.4 billion, slightly above the $2.38 billion analyst projection, but still essentially flat—up just 3.1% from the second quarter of 2011—with the previous year.
Guidance for third quarter and the rest of 2012 was the bigger problem. Potash told analysts to expect earnings per share of 70 cents to 90 cents for the third quarter against the current Wall Street estimate of 95 cents a share. For 2012 as a whole the company said earnings will be in a range of $2.80 to $3.20 a share. That’s down from the company’s prior projection of $3.20 to $3.60 a share.
The lowered guidance is a result of rising costs. Read more
Nothing like bad weather in the U.S. farm belt to give a boost to fertilizer stocks—at least according to Wall Street’s logic. On July 2 the U.S. Department of Agriculture slashed its rating for the condition of the U.S. corn crop to 48% good to excellent from 56% a week earlier. (The rating on the soybean crop went to 45% good to excellent from 53%.)
The logic goes like this: A bad drought in the Midwest that has shriveled the U.S. corn crop and driven up corn prices is good news for fertilizer maker. Higher prices for corn and other grains will put more money in farmers’ pockets and increase their purchases of fertilizer and other inputs.
Frankly, the logic seems flawed to me. Read more
Now even the normally optimistic International Fertilizer Industry Association is talking about excess capacity in the industry by 2015. The cause, the association said, is a $90 billion investment in new capacity that will put both nitrogen and potash fertilizers into massive surplus by that year—unless projects as cancelled or delayed.
There’s really nothing new in yesterday’s report—except that it came from the industry association. I think we can now say that forecasts of surplus capacity by 2015 are now the conventional wisdom.
Which makes your life kind of simple if you own any fertilizer stocks, such as Potash of Saskatchewan (POT), a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ : How do the long-term and short-term trends net out? Read more