This Fertilizer Stock Came Up Smelling Like Roses

Potash Corp. of Saskatchewan, Inc. POT reported quarterly earnings this morning that were markedly better than what Wall Street was expecting, and shares are moving higher this morning as a result. The Canada-based company reported second quarter earnings of 96 cents per share on $2.33 billion in revenues. Wall Street was looking for earnings of 85 cents per share on $2 billion in revenues. Revenues soared year-over-year, rising 61.8% from last year. The company also gave guidance for the third quarter, saying it expects to earn anywhere between 80 cents and $1 per share, as opposed to the Wall Street estimate of 89 cents. For the full year, the company expects to earn $3.40 to $3.80 per share. Wall Street expects full year earnings of $3.43 per share. “The continuation of strong fertilizer demand combined with the limitations of global production, especially in potash, resulted in tight fertilizer markets and rising prices for our products,” said PotashCorp President and Chief Executive Officer Bill Doyle. “With farmers committed to increasing yields and capitalizing on the unprecedented economic opportunity, we worked to keep pace with growing demand, which resulted in a record quarter for our company. We believe our ongoing investment in expanding potash operational capability is playing an integral role in the world's food story, and we demonstrated our increased ability to deliver – for our customers and our shareholders.” As potash, phosphate and nitrogen prices continued to rise during the quarter, the company was able to generate better margins, and gross margins nearly double as a result. Gleacher & Co analyst Edlain Rodriguez was pleasantly surprised by the price of potash. "The numbers look very good and are much stronger than expected," Rodriguez said. "The big difference is the potash price, which was much higher than what I expected." Potash inventories continue to fall, prices have continued to rise, and Potash, which is part of a monopoly with Uralkali, Belaruskali, and Mosaic MOS has greatly benefited. Inventories are 26% below the average of the past five years, and as the world's population continues to grow, there will continue to be a strain on potash prices. Potash, along with other nutrients, is used by farmers to help get extra yield out of their crops. Last year, Potash was the subject of a $50 billion takeover offer from BHP Billiton BHP, but the offer was ultimately nixed, as the Canadian government got involved and deemed the company to be a "national asset." That kind of intervention by a government should tell you how important potash, nitrogen and phosphate are to the world. Potash margins nearly doubled, nitrogen margins rose 67%, and phosphate margins nearly tripled, indicating that there continues to be incredible demand for Potash's products. This paragraph in the company's earnings release should really drive home the importance of this company and its competitors: "While seldom considered by those outside the potash business, operating facilities at full capability can be a challenge as disruptions from logistical, operational and geological issues are common. We continue to estimate global demand will approximate 55-60 million tonnes in 2011, but now anticipate that meeting the upper end of the range will be constrained by what we estimate is the industry's ability to produce." At less than 18 times 2011 earnings and less than 15 times 2012 expected earnings, Potash is a relatively inexpensive way to play the global food crisis. Shares also sport a small 0.5% dividend as well. As farmers continue to try to drive more and more yield from their crops, Potash will be right in the mix of things. It may not smell all that great, but your portfolio may come up smelling like roses if these trends continue. ACTION ITEMS:

Bullish:
Traders who believe that potash, nitrogen, and phosphate prices will continue to rise might want to consider the following trades:

• Go long Potash or any of its competitors in this group. That includes CF Industries CF, Mosaic MOS, Agrium AGU, and Terra Nitrogen TNH

• Another way to play the ongoing food crisis is to play genetically modified crops and seed protection. The best way to play that is through Monsanto MON.

Bearish:
Traders who believe that in the coming years global population will fall, hurting potash prices may consider alternate positions:

• There is a lot of hope and optimism baked into the future earnings of these companies. If there is a development that will allow farmers to increase yield without these nutrients, then these names become viable short candidates.

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