Potash Corp. Downgraded to Neutral - Analyst Blog

We are downgrading our recommendation on Potash Corp. of Saskatchewan Inc. (POT) driven by slowing shipments and demand. Potash Corp., the world's largest fertilizer enterprise, produces three primary plant nutrients - potash, phosphate and nitrogen.

Potash Corporation recorded strong third-quarter 2011 net earnings of $0.94 per share, up 147% from $0.38 in the prior-year quarter, beating the Zacks Consensus Estimate by a penny. Revenues increased 47.4% year over year to $2,321 million, driven primarily by higher nutrient prices.

Potash Corp. is expanding its operations in the New Brunswick plant. Construction of this new mining facility is in progress and is expected to be completed in 2013. Once the construction is complete, the facility is expected to ramp up by 2015. Once fully ramped up completed, the new mine will replace the existing underground operation and is expected to have an annual operational capability of 1.8 million tonnes.

Management believes that the projects that will be launched in future will be increasingly difficult and more expensive to execute. While some competitors are still working through the planning and feasibility of potential expansions, several of Potash's projects largely initiated and advanced during a period of lower construction and material costs are now completed or are in advanced stages of construction. 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 several years. This expanded operational capability gives Potash a competitive advantage. Potash is better prepared to meet the needs of its customers, its employees, suppliers and communities, and to deliver strong performance and exceptional returns for its shareholders. It has about two-thirds of its capital spending already behind it, which is important as construction and labor costs are climbing.

Even though there is uncertainty surrounding the U.S. economy and the sovereign debt situation in a number of European countries, the strain on the world's food supply is driving strong demand for all three nutrients of the company, especially potash. Due to tight potash supply in North America, Latin America and spot markets in Asia, the demand for potash is expected to rise as potash buyers are now seeking to secure the product. Potash Corp. expects this trend to continue in 2012. Meeting this requirement of increased demand of potash will be a challenge for the industry. Potash Corporation, however, is ready to face the challenge and began addressing this issue 8 years ago, having launched its potash expansion program. Potash Corp. expects strong demand from India as India's inventories have reduced to critically low levels.

Rising demand for food grain from the emerging economies and adverse weather have pushed grain prices to record levels, boosting fertilizer prices. However, shipments are temporarily slowing in the fourth quarter, but the demand is expected to continue to grow and consume record deliveries over the course of 2011.The company now estimates its full-year 2011 potash segment gross margin to be in the range of $2.8-$3.1 billion. For the fourth quarter, the company anticipates a larger allocation of sales to markets for standard product compared to the typically higher-netback granular markets.

The company competes with BASF ( BASFY ) and Mosaic Co. ( MOS ).

We currently maintain a Zacks #3 Rank (short-term Hold recommendation) on Potash and a long-term Neutral recommendation.

BASF SE ( BASFY ): Free Stock Analysis Report

MOSAIC CO/THE ( MOS ): Free Stock Analysis Report

POTASH SASK ( POT ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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