The big question with Potash Corp. of Saskatchewan Inc. is how much of the company's problems are just short-term demand issues that will be resolved relatively fast. If the answer points to better days in the longer term, then the stock looks very attractive right now. In fact, the company's profit warning on Wednesday could be seen as a gift to new investors.
The world's largest fertilizer producer cut its profit outlook for 2012. In July, it had forecast earnings ranging between $2.80 (U.S.) and $3.20 a share. Now, it is saying that earnings will fall below the low end of that range. According to Bloomberg News, the average forecast among 26 analysts had been $3.25 a share. The company will report its third quarter results on Oct. 25.
The share price fell as much as 2.6 per cent soon after the start of trading. It then recovered most of the lost ground by mid-morning, suggesting that a longer-term view is kicking in.
That makes sense. The shares trade at just 13-times estimated earnings, well below the five-year average price-to-earnings ratio of 23. In 2008, when the share price was about double what it is today (on a split-adjusted basis), the shares traded at 52-times earnings.
Of course, 2008 was a crazy year for Potash Corp. The stock briefly sat atop the S&P/TSX composite index with the biggest weighting among all Canadian companies, edging past Royal Bank of Canada. There was a bubble-like attitude toward the stock: As the world's largest fertilizer producer, it was seen as having tremendous influence on potash pricing – at a time when the world seemed desperate to get its hands on more fertilizer to boost crop yields. Potash Corp. looked like a can't-lose stock.
Since then, the company has looked mortal: The financial crisis and global recession hit the share price hard, and potash prices were cut down from record highs above $800 a metric ton. In early October, the chief executive of Mosaic Co. – the largest U.S. potash producer – told Bloomberg News that China was "very determined" to pay less than $470 a metric ton, the price it paid in the first half of this year.
But while the short-term doesn't look very attractive, the longer-term looks far better. The United Nations estimates that the global population is going to exceed 9 billion by 2050, and food production is going to have to rise by 70 per cent to meet their needs. While fertilizer isn't a one-stop solution to this challenge, it is certainly part of the solution – and Potash Corp. looks ideally positioned to benefit from it.
No wonder Australia's BHP Billiton Ltd. tried to snap up the company for about $40-billion – or a split-adjusted price of $43.33 per share – in 2010. Presumably, they were looking beyond quarterly forecasts.