August 1, 2016

Why I sold fertilizer stock POT

Potash Corp. ( POT) Thursday reported in-line earning per share for the second quarter, but weak sales.

It looks like the fertilizer cycle is bottoming out later than I had previously expected (just as I feared when I sold my POT shares at a loss months ago). As a result, management has cut the company's dividend for a second straight time, dropping it to $0.10 per quarter from a previous $0.25.

That said, the fact that Potash Corp. is paying a dividend at all is probably a slight positive. It's apparently a signpost management sees a cyclical bottom coming to fertilizer prices, as well a "channel restocking" from delayed contracts with India and China. (Potash prices are now below most cash costs, and POT is among the industry's lowest-cost producers.)

Of course, the negative here is that fertilizer prices probably won't recover any time soon. So, I expect Potash's earnings per share and cash-flow trajectory to disappoint for a long time to come.

Net/net EPS should be in the 60 cent to 90 cent range for several years -- well below the company's halcyon 2013 period. And given farmers' current state, I don't see a breakout coming any time soon.

At the same time, POT's valuation is in line with "trough" profitability. So, there's no "valuation case" to be made for the stock absent a better-than-expected recovery in fertilizer prices and profit margins.

The bottom line

Potash Corp. looks to me like it's "dead money" at best for the foreseeable future. That said, I'd be interested in the stock if it falls to around $12 to $14 a share from Thursday's $15.91 close.

Position: None.

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