Potash Earnings Distraction (POT, BHP)

Potash Corp. of Saskatchewan (NYSE: POT) is a company we feared would not really trade around its earnings and guidance.  The real news is still its pending offer from BHP Billiton plc (NYSE: BHP), and the company’s strategic alternatives.

A quick recap of earnings guidance is as follows: It beat earnings by $0.16, with $1.32 EPS versus $1.16 at Thomson Reuters; revenues rose about 43% from last year to $1.57 billion versus Thomson Reuters estimates of $1.31 billion.  The guidance was raised as well with FY10 earnings above consensus, ditto for 2011.  Potash Corp. now sees $5.75 to $6.00 EPS vs. $5.62 targets by Thomson Reuters; for 2011 it sees $8.00 to $8.75 EPS vs. $7.99 from Thomson Reuters.

The margins are getting impressive again.  The company put 2010 potash segment gross margin between $1.65 billion and $1.75 billion, with total shipments in the range of about 8.3 million to 8.5 million tonnes. 2010 phosphate and nitrogen gross margin is expected to be between $750 million and $850 million.

The company talked about tight inventories, strong demand and noted how its pricing is firm.  The company also sees a positive phosphate market into the spring and noted that nat-gas prices are helping.

Again, all that matters is the news about the merger. Many feel this merger is dead.  The company doesn’t want it and the Canadian government doesn’t seem to want it.

Potash Corp. shares are down 2.6% at $143.50, and investors need to recall that the market cap is about $42.5 billion on last look.

What investors need to consider is the price of Potash Corp. versus the buyout price of $130.00.  $143 is still a premium against the $130.00 offer and it is under the recent post-deal announcement highs of over $150.00.

The company is still exploring its strategic alternatives, and those could be anything.  A break-up, a divestiture, an investment from Ontario Teachers, or who knows what else… The company has maintained that BHP’s bid has been a distraction to management and a distraction over its own improving fundamentals.  Maybe this was a distraction, but it took shares from basically $110 to $150  after the deal was announced.

JON C. OGG