Potash Corp. (NYSE: POT) has been one of the amazing companies in an amazing sector, or at least it was back when the developing world was moving from one meal to two meals a day.  The leaders in this sector have been given the doubt over and over after each disappointing earnings report.  We have seen this same type of news in Mosaic Co. (NYSE: MOS) and other potash or fertilizer player.  Shares have usually sold off and then come right back up on to higher prices based upon analysts calling the news a buying opportunity.  The problem with the entire run up we have seen each time is that these earnings reports keep coming in either under expectations or with soft guidance and the promise of higher potash and fertilizer prices coming soon.  It has been all bark but no meat.

Potash Corp. reported $0.80 EPS versus $2.56 EPS a year ago on a 41% drop in revenue to $1.10 billion.  Thomson Reuters had estimates of $0.78 EPS and $1.07 billion in revenues.  It then pulled in its estimates for the current quarter and year, not just by a tad either.  The first quarter of 2010 estimates from the company were put at $0.70 to $1.00 EPS, shy of the Thomson Reuters figure of $1.10 EPS.  For 2010 those were brought down to a range of $4.00 to $5.00 EPS for 2010.  Thomson Reuters had its consensus earnings estimate at $5.89 EPS, and that figure was thought of by many as a very low-bar estimate after the company has already brought down estimates.  To show what we mean about the targets coming in, the Thomson Reuters estimate for 2010 just 3 months ago was closer to $6.90 EPS.

Here is what the news is doing to the sector today:

• Potash Corp. of Saskatchewan, Inc. (POT) is down 5% at $104.00 on over 10 million shares, 52-week trading range is $63.65 to $126.47.
• Mosaic Co. (NYSE: MOS) is down almost 5% at $55.16, 52-week trading range is $34.20 to $68.28.
• Agrium Inc. (NYSE: AGU) is down 4% at 457.22, 52-week trading range is $29.59 to $71.11.
• Market Vectors Agribusiness ETF (NYSE: MOO) is down 2.6% at $41.48, 52-week trading range is $24.14 to $47.90.

Here is the big issue for Potash Corp. and for its competitors… pricing.  There has been international dumping at what seems to be under market prices (sometimes well under) and it has affected real prices.  Contracts in India and China have come in far under what was modeled each time this occurs.  It seems that investors and economists got used to the notion that the old commodity bubble days were here to stay or that they would return immediately once the economy got off the ground.

When commodities were off the chart into record territory in 2007 to 2008, potash traded close to and sometimes through $1,000/ton.  Prices have been closer $350 to $400 depending upon location and terms, but it needs to be recalled that this compares to what used to be closer to $150/ton.  We do not expect that any industry executive will call for those low prices again, but a return to supply side pricing demand seems no closer than last month or a quarter ago.

CEO Bill Doyle has talked up how demand has been deferred on a short-term basis.  How many times can companies in this sector keep saying “it is close, not yet, but close…” and have investors believe it?  It is also understandable how investors can keep trying to discount the news of today for the implications of six to twelve months out.  But the guidance today seems as though there is not any strong demand or at least strong demand coupled with any pricing power for the entire 2010 planting and growing seasons.  I am the first to admit that ultimately farmers have to order more potash and fertilizer products, but the reality is that they can skimp and they can order lower quantities for potentially years before they risk drying out all the nutrients and minerals in the soil.

If we take the highest figure offered by the company, which is optimistic considering that Potash keeps ratcheting down estimates, this stock trades at more than 20-times forward earnings.  The only reason you see this now is because of the old price bubble and the wild card bet that China and India will suddenly bubble up all over again at the same time as the rest of the world and pay whatever prices the giant potash and fertilizer companies want to charge.  No value investors are poking around today unless they are falling for the trick bubble prices of $200 per share for Potash Corp. were fair prices for a continued period of time.

Whatever the new normal is, it is either going to take serious firming of a real prices or a hint of a rapid return to the ‘Chindia Food-Boom’ for 20-times forward earnings to be a fair price.   Either that, or the public has to start investing for a 2011 to 2012 blended earnings blindly.  With the risks in the market and with the forward multiples investors have to pay today for shares, does that seem fair?  Even if ‘fair’ has nothing to do with it, these stocks need to come in further before many investors will be willing to take a poke….

At some point investors will need to see a real hint of a turn rather than having to pay up and up for a promise of a turn in demand.  Brokerage firm analysts have talked these stocks up and up each time the shares go on sale.  Today does not give that feeling, at least not as much.

JON C. OGG

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