Potash: Stock Play for a Hungry World

Posted Dec 2nd 2010 2:20PM by Joseph Lazzaro
Filed under: Stocks to Buy, Potash Corp. of Saskatchewan (POT)

And so it goes with Potash Corp. (POT). Potash, first discussed here on March 3, 2009, at a price of $80.81, has been through the valuation ringer, of sorts.

In November, BHP Billiton (BBL) withdrew its unsolicited proposal to acquire Potash for $130.

As traders like to say, "No-oo problem. No problem at all." Potash is worth a lot more than one Benjamin plus a third.

That's because Potash remains one of the preeminent fertilizer companies in the world, producing three critical, primary plant nutrients and phosphate animal feed ingredients for both developed and developing world markets. It is the largest producer in the world of its namesake, potash, which accounted for more than 33% of revenue in 2009.

Further, look for that namesake fertilizer potash profits to continue to recover in 2011, on both higher volumes and price increases. Meanwhile, phosphate and nitrogen should record similar rising profit tracks, but with slightly tighter margins, on higher raw material costs. In sum, in a world of expanding middle classes in emerging markets, who have more money to spend on high-protein foods, Potash is well-positioned, to say the least.

The Thomson Reuters First Call FY2010/FY2011 EPS estimates for POT are $5.92 to $8.59. That FY2011 EPS estimate looks about 10-15% low, according to my analysis.

Place an 18x multiple on that $10 per share earnings upside, and one can begin to see what POT is worth, roughly $180-220 per share, according to my analysis.

Technically, after gapping-up to about $153 after the BHP Billton offer, POT has bided its time at/near $145. A recent dip below the key, 50-day moving average was short-lived -- a bullish sign.

2011 Outlook: I view Potash as a long-term play, but if you're looking to sell POT within the year, it's probably best to take your profits after it rises to $175 to $179, if it fails to rise above $180.

I'd also raise the sell/stop loss $110 from $79.

Stock Analysis: I consider Potash Corp. to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in KSS now; I'd put a sell/stop loss at $110. I would not consider a position if POT rises above $180.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.