Wall Street analysts tend to provide an updated look at the
companies they follow every month or two, ignoring short-termissues
and trends on a week-to-weekbasis . The good thing is you can use
this slow reaction to your benefit. When major news hits the wires
-- and analysts fail to even discuss it -- you have an opportunity
to seize the initiative before the crowd arrives.
This notion was brought home on March 11 when Brazil's mining
announced it would abandon plans to pursue a $5.9 billion mining
project in Argentina that was set to produce potash, a key
fertilizer raw material. That mine had been intended to produce
more than 4 million tons of potash each year, but now rival
producers can breathe a sigh of relief. After all, smaller industry
output is always a positive for pricing.
The reduction in industry output is likely to lead to higher
pricing andprofit forecasts for
Potash of Saskatchewan (NYSE:
, aiding industry supply-and-demand trends that were already
strengthening. Global demand for the fertilizer element cooled in
2012 as major buyers decided to whittle down inventories by roughly
4 million tons, according to Potash of Saskatchewan. Yet with
inventories now at manageable levels, the company expects to ship
55 million tons of the agricultural product this year, or almost 4
million more tons than 2012. "Activity remains robust in North and
South America with demand picking up in SE Asia,"note analysts at
We'll have to wait until analysts get around to adjusting their
pricing and supply forecasts now that Vale is keeping that extra
expected supply off themarket . But even before that change,
analysts alreadyspot a looming upturn for Potash's key metrics.
Goldman Sachs, for example, says that demand for all three of
Potash's fertilizer products -- potash, potassium and nitrogen --
are set to rebound in 2013 from 2012 levels. The "rebound in
operating rates in 2013 should drive a solidearnings recovery,"
Goldman's analysts say.
Now that much of the company's capital spending programs are
nearing completion, the company is on the cusp of paying alot more
attention to dividends and buybacks. Thedividend was recently
boosted 33%, after rising more than 100% in 2011 and 2012. Asfree
cash flow rises from here, more dividend hikes are expected to be
announced in the next few years. Analysts at Goldman Sachs expect
free cash flow to exceed $1.6 billion this year, $2.5 billion in
2014 and approach $3.5 billion by 2015.
That kind of prodigious free cash flow may also fuel share
buyback programs. Potash managed to reduce the share count from 973
million in 2007 to 877 million in 2011, but didn't buy back any
moreshares in 2012. Now, with the reduced capital spending and
expected commensurate surge in free cash flow, more buybacks may be
in the offing.
Risks to Consider:
Firming potash prices might induce Brazil's Vale to restart
development plans for its stalled Argentinean mine, which might
keep a lid on pricing.
Action to Take -->
The dividend growth and share buyback that analysts expect
underpinsCredit Suisse's "buy"rating and $50price target on
thestock . "POT is well positioned to potentially return a
significant amount of capital to shareholders over the next 3
years," the analysts note.
By the time analysts digest news of Vale's mining changes,
estimates for Potash may move even higher. If you want to be ahead
of the crowd, now is the time to get into this stock.
-- David Sterman
[Note: The next big commodities play is unfolding right now...
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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