Potash Corp. Poised to Double Market Capitalization

by: FP Trading Desk September 01, 2008 | about stocks: POT    

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Despite some near term hiccups based on ongoing labour uncertainty and market volatility, Potash Corp. of Saskatchewan Inc. (POT) is still poised to more than double its market capitalization to a whopping C$130-billion sometime over the next year, according to Canaccord Adams analyst Keith Carpenter.

Mr. Carpenter reiterated his "buy" rating and his impressive 12-month price target of C$425 for Potash Corp. shares on Friday, while weighing in on the announcement earlier this week from the company that it has restarted potash mining and milling operations at its Allan mine in Saskatchewan.

In early August, unionized employees at Potash Corp's Allan, Cory and Patience Lake mines potash operations went on strike.  Allan is the largest of the mines impacted by the worker's action, accounting for approximately 19% of the company’s annual potash production.  The company said in a statement that contingency plans continue to be evaluated for the Cory and Patience Lake facilities while progress on potash debottlenecking and expansion projects at all three sites has been minimally impacted by the strikes.

In a note to clients, Mr. Carpenter said:

While we are encouraged to see contingency measures put in place, in our model we continue to assume a three-month reduction of supply from the three affected mines.

If we were to assume that the strike continues for the remainder of 2008, our full-year EPS estimate would drop to approximately $11.94 from $12.69.

JPMorgan analyst David Silver, meanwhile, said a strike lasting eight weeks would reduce Potash earnings by C$0.15 to C$0.20 per share and importantly may force the company to declare force majeure due to an inability to meet its current contractual commitments. Force majeure is a legal clause that allows a company to miss deliveries because of circumstances beyond its control.

Canaccord's Mr. Carpenter told clients he expects more volatility ahead for the stock in the short term with shares remaining caught up in the current unsettled market sentiment. 

But ultimately, he added, the stock will regain its swagger and head towards his lofty price target based on the company's growth profile and earnings that will be "unmatched by its peers."

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This article has 7 comments:

  •  
    Sep 01 09:51 AM
    Their current PE is 27. For its market cap to double, you'd have to assume that earnings would double yoy and their PE would stay the same, which is high to start with. Earnings would have to quadruple for this stock to have a reasonable PE and the market cap to double. They are coming off of incredible earnings rises, and you just can't sustain that kind of run-up long term. They are to the point of affecting demand because of the price. I'm bullish on potash and fertilizer, and made some good money on YARIY --- bought before the run-up and sold near the high, now back in at a lower price and waiting for the next run. But double the market cap?!? Maybe with a lot of hype like this article, but you won't see it get back up to where it was for at least several years, if at all. Last time I checked ag was one of those cyclical businesses where one year they have record profits and the next they're saying they're going to go out of business. The party is over on this one. Not that there isn't some good appreciation left in it. But double market cap?!? That's ridiculous.
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  •  
    Sep 01 10:14 AM
    Well......CT programmer, spoken like a true " green eyeshade", If I had any more money to invest right now, I'd be buying POT bout as much as I could buy with the money I had. Potash isn't like any other ag product, it is THE primary ingredient other than the seed leading to the production of any ag product growing out of the ground. Better go crunch some more numbers. I love all the green eyeshade prognosticators, chartists, analysts, et al who base all their guesswork on sectors instead of individual companies or products.
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  •  
    Sep 01 12:27 PM
    Much of POT's sales for 2009 are already locked in at much higher prices than today. Their earnings will rise dramatically even if potash prices pull back (which seems unlikely until 2011-2012). WIth these kind of price rises, using a trailing P/E for anything is pretty much useless, you have to use forward P/E estimates. And POT numbers are very reasonable, with the forward P/E low, therefore implying small earnings growth (relative to last year) long term.
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  •  
    Sep 01 06:38 PM
    I concur with JG. JPMorgan has POT earning $25 per share for 2009. If JPM is correct, POT would have a P/E ratio of 17 were it to hit Carpenter's $425 target, not 27. 2008 earnings should come in at a minimum of $12 per share, which means that it is currently trading at less than a 15 P/E. The voluble POT CEO, Bill Doyle, has not withdrawn his guidance for the quarter despite the strike so my guess is that things are still swimming along despite current labor difficulties.
    Peter Lynch used to say that compounded annual earnings growth is the key to share appreciation. There is no reason to expect that POT, with its great earnings and revenue prospects, will prove an exception to Lynch's rule.
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  •  
    Sep 02 01:15 AM
    While the long term fundamentals are compelling, POT has recently broken down below some key support levels at $180, including a long term rising trendline dating back to July 2006. The recent rise has been on diminishing volume. The near term direction is probably downward to the $120 level before another run at the high and a probable resumption of the uptrend.
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  •  
    Sep 02 10:40 AM
    I'm not bashing POT, or saying that its earnings are anything short of phenomenal. Even though I don't own POT, I own YARIY, which tracks POT fairly closely (but outperforms it in my opinion). I'm not sure what Blue Collar Guy means by "green eyeshade", but I recently cashed in on a year-long run-up of YARIY that netted me somewhere near 200% return. And I just bought back in when it came down (maybe a little too early as alancelt mentions). That obviously shows I'm long on ag, and specifically fertilizers. And more specifically YARIY. But my problem is with the "double market cap" hype. I'm bullish, but skeptical that it will see the levels that it previously did when there was nothing else to invest in making money. And if you think the higher prices for potash/fert aren't already built into the price, when everyone knows that they'll likely break another record the next few quarters, well good luck on your investing. I expect a solid return in the next year, but don't expect anywhere near another 200% return. But I do hope I'm wrong and you super-bulls are all correct.
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  •  
    Sep 03 05:42 PM
    Hey John,
    They don't allow squirrels here :)
    (Harbinger)
    Reply | Link to Comment
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