We are maintaining our Neutral recommendation on the world's
largest fertilizer company
Potash Corporation of Saskatchewan Inc.
). The Canada-based company posted mixed results in second-quarter
2012 with adjusted earnings narrowly missing the Zacks Consensus
Estimate while revenues beating the forecast.
Profit, as reported, slid 38% year over year, dragged down by a
hefty impairment charge associated with the company's investment in
Sinofert Holdings Limited. Revenues rose 3%, aided by higher potash
demand. The company sniped its earnings target for 2012 factoring
in the impairment charge.
Potash Corp., which competes with
), has a competitive advantage stemming from its mining rights to
the world's largest potash reserve. The company has a strong
geographic diversification and continues to invest in expanding its
operational capability in potash.
While there is uncertainty surrounding the U.S. economy and the
sovereign debt crisis in Europe, the strain on the world's food
supply is driving strong demand for all three nutrients of the
company, especially potash.
Given the tight potash supply in North America, Latin America
and spot markets in Asia, the demand for potash is expected to rise
as buyers are now seeking to secure the product. Potash Corp.
expects this trend to continue in 2012.
With more than half of the world's estimated new supply coming
from its projects between now and 2015, the company believes that
it can capture a significant share of demand growth over the next
Potash Corp., like other major fertilizer companies, is poised
to gain from the severe U.S. Midwest drought. High crop prices
(especially for corn) and tight inventories resulting from the
drought are expected to create significant demand for its crop
nutrients, especially potash. Both demand and shipments of potash
are expected to strengthen in the remainder of 2012.
However, the company is exposed to macroeconomic uncertainties
and other issues such as price volatility and currency exchange
fluctuation. While need for potash is significant in major
developing economies like China and India in the long run, a few
short-term challenges across these markets may impact the near-term
demand for fertilizers.
The Indian government's move to trim potash subsidy levels
coupled with higher retail pricing resulted in lower demand in that
country. As a result, the company has scaled back its potash demand
outlook for India for this year.
Potash Corp currently retains a Zacks #3 Rank, which translates
into a short-term (1 to 3 months) Hold rating.
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POTASH SASK (POT): Free Stock Analysis Report
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