Potash Corp. (POT) Q4 Earnings: Is a Beat in the Cards?

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Potash Corp.POT is set to release fourth-quarter 2016 results before the opening bell on Jan 26.

The fertilizer giant's adjusted earnings of 11 cents per share for third-quarter 2016 beat the Zacks Consensus Estimate of 9 cents. The company's earnings missed the Zacks Consensus Estimate in two of the trailing four quarters, beat once and came in line in another occasion, with an average negative surprise of 1.01%.

Let's see how things are shaping up for this announcement.

Why a Likely Positive Surprise?

Our proven model shows that Potash Corp. is likely to beat earnings because it has the right combination of two key ingredients.

Positive Zacks ESP:Earnings ESP , which represents the difference between the Most Accurate estimate, which stands at 11 cents per share, and the Zacks Consensus Estimate, which stands at 9 cents per share, is +22.22%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter

Zacks Rank: Potash Corp. currently holds a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank of #1 (Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. The Sell-rated stocks (#4 or 5) should never be considered going into an earnings announcement.

The combination of Potash Corp.'s Zacks Rank #3 and +22.22% ESP makes it likely for earnings to beat estimates this quarter.

Potash Corporation of Saskatchewan Inc. Price and EPS Surprise

Potash Corporation of Saskatchewan Inc. Price and EPS Surprise | Potash Corporation of Saskatchewan Inc. Quote

Factors to Consider

Potash Corp., in its last earnings call, narrowed its 2016 potash sales volumes guidance to the range of 8.5-8.7 million tons, from 8.3-8.8 million tons. The company revealed that it expects lower prices earlier in the year to weigh on the results for the balance of 2016. The company now sees potash gross margin to be in the $400-$500 million range compared with its prior view of $400-$600 million.

Potash Corp. expects a weaker price environment to hurt its nitrogen and phosphate segments through the fourth quarter of 2016. It lowered the combined nitrogen and phosphate gross margin outlook for the year to the $400-$450 million range from $400-$550 million.

The company also narrowed its 2016 earnings guidance to 40-45 cents per share, including notable charges of 11 cents per share through the first half, from 40-55 cents per share guided earlier. This lowered guidance is primarily due to weak nitrogen prices.

Potash Corp. is reeling under the effects of the depressed prices of crop nutrients. Prices for potash continue to be hurt by elevated supply. Depressed global energy prices and higher supply have also contributed to a softer nitrogen-pricing environment. A challenging pricing environment may continue to weigh on the company's December quarter results.

The broader fertilizer industry remains hamstrung by a slew of headwinds including low prices of nutrients and depressed farm income. The prevailing softness in agricultural commodity pricing remains a concern for companies as it is hindering fertilizer use by farmers, given the adverse effect of lower crop pricing on growers' income. A weak crop pricing environment has created uncertainty about potash consumption.

However, in a major move, Potash Corp. and Agrium AGU agreed to merge their businesses to create a fertilizer powerhouse with a pro forma enterprise value of $36 billion. The proposed merger would create the world's largest crop nutrient supplier and the integrated company will be better placed to counter the headwinds in the crop nutrient markets. The transaction is expected to conclude in mid-2017, subject to customary closing conditions.

The combined company will also be better positioned to serve customers and growers with low-cost, high-value products and services and complementary assets. The integrated company is expected to generate as much as $500 million of annual operating synergies. Roughly $250 million of these synergies are expected to be achieved by the end of the first year following the completion of the transaction.

Moreover, Potash Corp.'s expanded operational capability provides the company with an advantage to increase its share of the demand growth in the future. The company is also expected see more customer engagement in the fourth-quarter along with healthy demand in North America.

Potash Corp. has outperformed the Zacks categorized Fertilizers industry in the last three months. The company's shares gained 18.4%, while the growth was recorded by the industry was 16.7%.

Other Stocks That Warrant a Look

Here are some stocks in the basic materials space that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Methanex Corporation MEOH has an Earnings ESP of +53.33% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

The Mosaic Company MOS has an Earnings ESP of +50% and carries a Zacks Rank #3.

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Methanex Corporation (MEOH): Free Stock Analysis Report

Potash Corporation of Saskatchewan Inc. (POT): Free Stock Analysis Report

Agrium Inc. (AGU): Free Stock Analysis Report

Mosaic Company (The) (MOS): 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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