I’m putting in a buy Potash of Saskatchewan (POT) today. I wish it were $10 a share cheaper, but the company just delivered the kind of really terrible quarter that marks a bottom. Investors cheered–well, they bought–when the company told them that the September quarter will be even worse.
All that’s fine with me. I want to own this stock for the long-run increase in global demand for food. That’s why it’s in The Jubak Picks 50 portfolio.
In the shorter-term, I like the stock too because it fits the commodity investing model that I laid out in my last post on BHP Billiton (BHP). Potash, the world’s largest producer of potash fertilizer, controls about 22% of global potash capacity. The company has slashed production and idled about half of its capacity. That doesn’t give the company the ability to control prices, but it does enable Potash to strongly influence, let us say, the amount of idle capacity that comes back into production and when.
And that’s exactly what I want to see, as I laid out in my last post,  in a commodity stock during what is likely to be a slow global economic recovery. In addition to the stock’s presence in my long-term The Jubak Picks 50 portfolio, I’m adding it to the 12-18 month Jubak’s Picks list with this column.
It’s hard to imagine a worse quarter. Potash said that second quarter earnings fell by 79% from the second quarter of 2008. Earnings per shar came in at just 32 cents, way below the 71 cents Wall Street had expected.
And then the company topped that bad news with a dash of lowered guidance for the rest of the year. Sales volume for all of 2009 will be just 4.5 to 5 million metric tons, a big drop from the 8.5 million tons the companyh sold in 2008. Earnings for the full year will be $4 to $5 instead of the $7 to $8 a share that the company had forecast in April.
The problem is that demand for potash fertilizer has plunged off a cliff, pretty much all over the world. Company sales in North America were down in th second quarter of 2009 by 82% from the second quarter of 2008, and sales outside of North America were even worse, falling 88%. Companies, including Potash, cut productin in response but thee was simply no way that they could cut production fast enough to keep up. Inventories climbed in June, according to Potash, to 115% of the trailing five-year average and now represent about 7% of annual global demand.
So why do you want to buy Potash?
In the short-term because this looks like a bottom.
First, in demand. Farmers can skimp on fertilizer for one growing season without taking a huge hit to yields but cutting back for two seasons starts to cut into harvests. The expectation, now is that farmers will increase their demand for fertilizer for the 2010 growing season and that will start to show up in orders as early as this fall.
And second in prices. In early July Russian potash giant Silvinit signed a deal with one of India’s biggest potash importers at $460 a metric ton. That’s a drop of $165 a ton from the contract prices Indian importers paid in March 2008 and $240 a ton below prices in contracts signed with Korean, Japanese, and Korean importers. The belief right now is that the $460 a ton price set in the Russia/India deal will set the benchmark for deals in the near future.
In the long-term because this stock is one of the best ways to play the rising global demand for food.
In a world with a rising population and where some of that population is increasing able to demand better food and mor protein, and where the amount of arable land is shrinking thanks to water shortages, urban development, and environmental degradation, fertilizer is one of the few ways to increase food production. (Better seeds and increased irrigation are others.) The average farmer in developing economies such as  China, Brazil and India applies half as much fertilizer as a farmer in a developed economy.
The world hasn’t added significant potash capacity in the last ten years. It takes about five years and about $2.5 billion to develop a new potash mine from scratch. That leaves producers with excess capacity–and Potash–is the biggest of those as the only big source of supply when demand picks up again.
As of July 23, I’d adding these shares to Jubak’s Picks–they’re already in The Jubak Picks 50 portfolio–with a target price of $125 a share as of June 2010. (Full disclosure: I own shares of Potash in my personal portfolio. I will buy more three days after this post.)
Jim,
Given dollar devaluation would there be a better bang for the buck in U.S. fertilizer manufacturers as opposed to the Canadian POT?
Hi Jim, i have been reading your post and your book. thank you for your insight. I agree on your view on POT, I think the CEO said that Dec 09 would see the demand start to come back on. I reckon by March next year we can see this stock above $100
Thanks Jim for getting this website up so I can still follow your ideas and thought processes on investing.
Jim:
I always wondered what your buying 3 days after the post meant. Is it 3 days or 3 business days. If you post on Tuesday do you buy on Friday and if you post on Friday do you buy on Monday? Just want to know though it doesn’t really affect what and when I do it.
It really is good to see your new site, an improvement when compared to MSN. Thanks for the suggestions, a great place to start and sometimes end.
Thanks for the analysis Jim. It is always thoughful. I also like POT for all the reasons you mention. I also like it because I think the US dollar will continue to weaken for quite a while because there is no will control entitlements in the US. That should give investors a double play when world demand picks up.
Jim,
What do you think of a company like TRA smaller market cap and lot’s of cash?
sliman, I’m going to do a post next week on MON versus SYT (Syngenta, another seed company)
Jim
That is true about the p/e on cyclicals but if earnings are down for two years then now would be to early to buy. What do you think of Monsanto compared to Potash as another ag play. Thanks for all your great articles over the years.
Sliman, also just wanted to note that with cylical a high pe comes at the bottom because the e collapses more quickly than the p. If earnings rebound to around $10, I’d expect pe to come down rather than for the stock to trade at 20 times earnings or $200.
I have been following Jim since the dotcom days and I havent had much success in getting a better bargain by waiting for a few more days after his recommendation. Perhaps its just me – but I think if you can do this successfully, you can also time the market successfully.
TBoone, I don’t think this is a normal market. What I’m seeing is a lot of gains in stock prices today that anticipate fundamentals that are still 6 months or more off. The question is “Will stock prices rise to anticipate those fundamentals very quickly leraving stocks to then go sideways for months? Or will we see an intermediate pull back on recognition that the fundamentals are further away than expected? I don’ty know but I suspect the former. There will be a correction when reality turns out to be disappointing but I simply can’t tell when that correction will be and how much of a gain investors who get in early might be able to reap. Strange and difficult times to figure.
Of course. thanks
Jubak buys 3 days after his articles, and as a long term investment these small daily fluctuations does not matter that much. The global food crunch has years to play out. If you are a short term investor POT might not be the right pick for you. It’s very hard to try to time the market and buy at the lowest point and sell at the highest. 🙂
I think I agree with sliman. Nice pick but why buy on an 8% up day. Isn’t there going to be some pull back and perhaps a little better op to buy even in the next couple days?
Jim
I am sure you will be able to buy Potash $10 cheaper. P/E is now 20 for 2009. Sept and Oct market sell off could happen. What is the hurry?
besides buying some POT Jim, would you also buy some RJA, the Jim Rogers Commodity fund?