POTASH CORP. OF SASKATCHEWAN $42(Toronto symbol POT; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 859.1 million; Market cap: $36.1 billion; Price-to-sales ratio: 4.2; Dividend yield: 1.3%; TSINetwork Rating: Average; www.potashcorp.com) is the world’s largest fertilizer producer. Its six potash mines in Saskatchewan and one in New Brunswick account for 20% of global potash capacity. Four of its mines have reserves of between 75 and 108 years. It also makes fertilizers from nitrogen and phosphate.
Results reflect erratic fertilizer prices
The company’s sales and earnings vary with volatile fertilizer prices. That’s why its sales jumped from $5.2 billion in 2007 to $9.4 billion in 2008, but dropped to $4.0 billion in 2009 (all amounts except share price and market cap in U.S. dollars). Sales recovered to $6.5 billion in 2010, and rose to $8.7 billion in 2011.
Earnings shot up from $1.15 a share (or a total of $1.1 billion) in 2007 to $3.67 a share (or $3.5 billion) in 2008, but fell to $1.08 a share (or $987.8 million) in 2009. (All per-share amounts adjusted for a 3 -for-1 share split in February 2011.) Earnings then turned around and rose to $1.98 a share (or $1.8 billion) in 2010, and to $3.51 a share (or $3.1 billion) in 2011.
Cash flow per share soared from $1.46 in 2007 to $4.32 in 2008. It fell to $1.46 in 2009 before climbing to $2.60 in 2010, and to $4.16 in 2011.
Potash prices continue to strengthen: the company sold its potash at an average price of $434 a tonne in the first half of 2012, up 11.3% from $390 a year earlier. That’s because the drought in North America has pushed up grain and corn prices. As a result, farmers are applying more fertilizer to improve their crop yields. Moreover, rising sales to developing regions, such as South America and Asia, have also boosted prices.
Big production jump on the way
The improving outlook for fertilizer prices is prompting Potash Corp. to increase its production. The company aims to raise its annual potash capacity from 13.3 million tonnes at the end of 2011 to 17.1 million tonnes by 2015.
To meet this goal, Potash Corp. will probably spend $2.2 billion in 2012 to expand its mines and upgrade its facilities. The company can easily afford these costs: Its 2012 cash flow will probably exceed $3.6 billion.
Potash Corp.’s strong balance sheet also cuts its risk: its long-term debt of $3.5 billion is just 10% of its market cap, and it holds cash of $491 million, or $0.57 a share.
Attractive multiples for a global leader
The stock trades at 12.5 times the $3.36 U.S. a share that Potash Corp. will probably earn in 2012. It also trades at 10.1 times its projected cash flow of $4.15 U.S. a share. These are low multiples in light of Potash Corp.’s high-quality reserves and the rising need for food. The $0.56 U.S. a share dividend yields 1.3%.
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