Potash Earnings Issues Now Credibility Issues (POT, MOS, AGU, CF, TRA, TNH, IPI, MOO)

Potash Corporation of Saskatchewan Inc. (NYSE: POT) did last night what most traders already feared was coming. The Canadian potash supply giant said that weak demand for its products and lower prices were going to take earnings for the quarter down to about $0.70 EPS versus a previous forecast of $1.10 to $1.50 EPS.  This is hitting other potash and fertilizer companies including Mosaic Co. (NYSE: MOS), Agrium Inc. (NYSE: AGU), CF Industries Holdings, Inc. (NYSE: CF), Terra Industries Inc. (NYSE: TRA), Terra Nitrogen Company, L.P. (NYSE: TNH), and Intrepid Potash, Inc. (NYSE: IPI).  Even the Market Vectors Agribusiness ETF (NYSE: MOO) is indicated to open lower this morning.

Mosaic Co. (NYSE: MOS) is indicated down 4% around $41.25.

Agrium Inc. (NYSE: AGU) is indicated down about 4% around $39.50.

CF Industries Holdings, Inc. (NYSE: CF) is indicated down around 4% around the $73.00 mark.

Terra Industries Inc. (NYSE: TRA) is indicated down about 2% to 3% around $25.20.

Terra Nitrogen Company, L.P. (NYSE: TNH) is still high priced and indications are not yet in.

Intrepid Potash, Inc. (NYSE: IPI) is indicated down over 4% after a $27.32 close but no real indications have been seen.

Our single largest issue here with the severity of the shortfall is that it sounds almost exactly the same as the K+S warning we covered before.  The issue is that this was 8 days before the Thursday warnings from Potash Corp.

The question to ask yourself is just how much management knew about things looking very soft.  We aren’t going to blindly accuse anyone of not living up to their duties, but the reality is that if this was a minor warning the questions might not be brought up.  But a warning of this size doesn’t exactly just get turned in on a slipped piece of paper on to the CEO’s desk while he is driving home and isn’t looking.  Potash Corp. had traded in a range of $110 to almost $120 from late May to early June.  It looks like shares will be opening in the mid-$80’s this morning.

Fertilizer and potash come and go as the “sector of choice” for investors.  Sometimes it’s hot, and sometimes not.  For now, fertilizers are back to smelling like you know what.

Our advice to management in the potash and fertilizer segment is simple.  If you know your quarter is going to smell like raw fertilizer, you better go ahead and come clean now.  Otherwise the credibility issues will come more frequently and the attorneys filing class action suits will have more ground to stand on with accusations that you had more than one instance to have assumed there were problems.

Jon C. Ogg
June 26, 2009