Citing global economic concerns, Potash Corp (POT) reported fourth quarter earnings of $683 million or $0.78 per share on revenues of $1.86 billion. Despite earnings being 39 percent higher than in the same quarter a year ago, it was ¢0.10 below consensus analyst estimates of $0.88 per share. Analysts expected revenues of 2.09 billion. For the full-year, company earnings of $3.51 per share on $8.7 billion in revenues each represent the second highest totals in company history.
Despite these accomplishments many questions remain: Has the 4th quarter marked the beginning of a cyclical slowdown in the agricultural chemicals business? Will recent statements by the Federal Reserve mark the beginning of QE3 and effectively put price declines to a halt? If so, will persistently high prices cause destruction of demand globally?
In 2011 46% of Potash Corp. sales were from its potash operating segment:
Source: The Mays Report
With offshore sales representing nearly 60 percent of total potash sales exchange rates play an important role in pricing.
Potash
Dealers begin filling customer orders out of inventory, anticipating lower prices in the spring. The result is fewer tons sold and lower pricing in the 4th quarter. Net sales of $686 million was 11.3 percent lower than a year ago. On the strength of the first three-quarters, full-year potash sales of $3.98 billion easily surpassed last years $3.0 billion total. Potash sales volume was 1.6 million metric tons, which was 800,000 metric tons lower than the same quarter a year ago.
Source: The Mays Report
Potash Corp reported that average realized price was $431 per metric ton in the 4th quarter versus $323 per metric ton in the 4th quarter of FY 2010.
Source: The Mays Report
However, the price received per ton in the 4th quarter is lower than the $451 per metric ton in the 3rd quarter of fiscal year 2011.
For the full year, metric tons sold topped 9 million, driven by record shipments by Canpotex, the offshore marketing agency for Potash Corp, Mosaic (MOS), and Agrium (AGU). Average price received per metric ton for the full-year was $412 versus $316 per metric ton in fiscal year 2010.
Phosphate
Despite lower sales volumes, phosphate net sales were $569 million in the 4th quarter, 17.5 percent higher than a year ago. The 890,000 metric tons sold was 7.7 percent lower than last years 965,000.
However, slack demand for solid phosphate fertilizer was offset by higher demand for liquid and industrial use fertilizers combined with higher prices. Even with spot market pricing falling during the 4th quarter, average realized price was $631 per metric ton versus $495 in the same period last year. In the 3rd quarter average price realized was $602.
Source: The Mays Report
The 1st quarter of 2012 will be challenging as DAP phosphate pricing has tumbled. Recent DAP swap prices for the January through March period have traded in range of $437 - $460 per metric ton.
Nitrogen
Nitrogen sales volume was 15 percent lower with 1.1 million metric tons sold versus 1.3 million in the same period of 2010. Sales volume was also slightly lower for the full year, coming in at 5.0 million metric tons versus 5.2 million in 2010. By the end of the fourth quarter nitrogen prices had declined. However, the company managed to have an average realized price of $461 per metric ton in the 4th quarter versus $325 a year earlier. In the 3rd quarter average realized nitrogen price was $424 per ton. Strong industrial / feed demand offset weak fertilizer volumes.
Source: The Mays Report
Nitrogen pricing is not so favorable in early 2012 as recent swap prices of Ammonia and Urea for the January through March period have been in a range of $345 - $370 a metric ton for Urea and $400 - $555 a metric ton for Ammonia. This is a huge drop from the $502 4th quarter average price of Urea and the $607 average price realized for ammonia.
Source: The Mays Report
The company expects 2012 to "mirror" 2011. This is another way of saying that revenues and earnings will be flat in 2012. Full year 2011 earnings came in at the low-end of company estimates of $3.40 - $3.80 per share, which was an increase from an earlier estimate of $3.00 - $3.40 per share made in the second quarter of 2011. The company also lowered its 2012 estimate of potash shipments from 58 - 60 million metric tons to 55 -58 million.
Despite the stocks recent rebound in response to the drought weather conditions in South America, on a relative basis Potash Corp. looks expensive compared to other fertilizer companies as well as the peer group.
Source: The Mays Report
Adjusting for the 3-to-1 stock split, the stock traded as low as $17.80 a share on December 5th, 2008. In a worse case economic scenario the stock could fall as below $30 per share although I think that is very unlikely. On the other hand, if another round of quantitative easing gets under way, all bearish bets are off for commodities as we have seen what a powerful influence QE can have on asset prices.
We are entering a seasonally slow period for the fertilizer companies. If it were not for so many conflicting issues from outside markets that could impact the stock, I'd consider picking up a few shares in early to mid-February when the industry inventory-to-shipments ratio touches its usual seasonal high. However, the European debt crises threatens to extend the slowdown if the dollar strengthens against the euro while continuing accommodative monetary policy could hinder the dollars rise. Add South American weather to the mix and you have a very muddy picture for the next few months and possibly most of 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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