On Sep 2, we downgraded leading fertilizer company
Potash Corp. of Saskatchewan, Inc.
) to Underperform factoring in the weak price environment and a
still challenging demand scenario in India.
Why the Downgrade?
Both revenues and earnings for second-quarter 2013, reported on
Jul 25, miss Zacks Consensus Estimates. Revenues fell by double
digits year over year, hurt by lower pricing across all three
nutrients and competitive pressure. The company cut its earnings
forecast for the full year taking into account the price decline.
Estimates for Potash Corp. are on the downswing following the
release of the second quarter results. The Zacks Consensus
Estimate for 2013 has gone down roughly 17% to $2.48 per share as
most of the estimates were revised downward. On a similar note,
the Zacks Consensus Estimate for 2014 has slipped roughly 24% to
$2.48. With the Zacks Consensus Estimates for both 2012 and 2013
going down, Potash Corp. now has a Zacks #5 Rank (Strong Sell).
While Potash Corp. will benefit from strong geographic
diversification and expanded operational capability in potash, it
is exposed to macroeconomic uncertainties and price volatility.
Average realized potash price fell 18% year over year in the
second quarter as competitive pressure pulled down contract and
spot market prices. Pricing pressure was also witnessed in the
Moreover, Potash Corp. is seeing somewhat weak potash demand in
India, a key market. Indian government's move to trim potash
subsidy levels coupled with higher retail pricing and local
currency devaluation resulted in lower demand in the country.
Adding to the problems is declining crop yields. These challenges
may sustain through second-half 2013.
We also account for significant uncertainty in the potash market
following the recent exit of world's largest potash maker
Uralkali Group from one of the biggest potash cartels - the
Belarus Potash Company (BPC). Uralkali's move has triggered
industry-wide fear of a price war which may push potash prices
down and put significant pressure on fertilizer makers.
Other Stocks to Consider
While we prefer to avoid Potash Corp., other companies in the
basic materials sector with favorable Zacks Rank are
Minerals Technologies Inc.
Sensient Technologies Corporation
). While Ferro retains a Zacks Rank #1 (Strong Buy), both
Minerals Technologies and Sensient Technologies retain a Zacks
Rank #2 (Buy).
FERRO CORP (FOE): Free Stock Analysis Report
MINERAL TECH (MTX): Free Stock Analysis
POTASH SASK (POT): Free Stock Analysis Report
SENSIENT TECH (SXT): Free Stock Analysis
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