To live off the land is one of life's enduring romantic notions, and it views the planet as a limitless provider. The world's population boom, however, is straining the entire food chain, and soaring prices for agricultural commodities have encouraged aggressive farming and shortened crop cycles. To keep feeding the world, it is increasingly crucial to nourish the exhausted earth that feeds us all.
Potash Corp. of Saskatchewan is the world's largest fertilizer company. From its base in Saskatoon, Saskatchewan, the company, with a market value of $13 billion, has customers everywhere crops are grown and ships to every continent except Antarctica. In particular, it has cornered the high-margin market in potash, an essential nutrient plants need for healthy growth.
A chart of its stock, which trades at the New York stock exchange under the deceptive ticker POT, also is a picture of healthy growth. At about 133, the shares have climbed 65% this year as profits improved, compared with 10% for the Dow Jones U.S. basic materials index.
The stock's growth spurt has raised questions about remaining upside, and the shares are indeed likely to fluctuate in the short term. But Potash Corp.'s longer-term prospects are peerless, given the world's dependence on its potash stash. At the recent Art of Successful Investing conference, organized by Barron's, Felix Zulauf, president of Zulauf Asset Management, called Potash Corp. a less risky way than volatile grain trading to profit from growing corn demand and Asia's rising beef consumption.
Since that Oct. 23 conference, the stock has climbed 16%, bringing to 39% the gains from a rally that started in mid-September. But that looks tame next to corn's surge of 46% during the same span.
Meanwhile, the ratio of coarse grains stored worldwide relative to what is consumed is projected by the U.S. Department of Agriculture to drop below 15%, a record. Soaring grain prices and depleting inventories drive farmers to apply more fertilizers in a clamor to boost crop yields. Citigroup analyst Brian Yu, who began covering the stock in late September only to see his price target of 125 quickly met, has nudged his target to 140, and he expects Potash Corp. to deliver "positive earnings surprises" in an "industry up-cycle."
Short-term catalysts also favor the company. Talks with China will begin later this month about 2007 delivery, and months of halted shipments during an earlier round of talks and a drained stockpile will give Potash Corp. bargaining power in this key market.
Just last week, flooding forced Russia's largest potash company, OAO Uralkali, to shutter a major mine, and the supply shock in this stretched market will drive up 2007 prices. "Potash Corp. will receive most of the volume benefit of the Uralkali closure, since nearly all other producers will be operating near capacity levels in 2007," says Merrill Lynch analyst Don Carson, who last week upgraded the stock to Buy.
At first blush, the shares look fully valued at 19 times 2007 earnings, compared with about 14 times for smaller North American companies like Agrium (POT.NYS) and Mosaic (MOS). But that does not count equity stakes worth $2.3 billion -- or more than $20 a share -- in foreign agri-chemical companies like Arab Potash, Chile's SQM ( SQM), Israel Chemicals and the Chinese fertilizer distributor Sinofert. Strip these out, and Potash Corp. has a multiple of 16 times, roughly in line with its 15-year median. |
