Potash Corp., Agrium Caught in Industry-Wide Downturn

by: J. Amberger August 06, 2008 | about stocks: AGU / POT    

J. Christoph Amberger

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Potash Corp. Saskatchewan (NYSE:POT), the aptly named chemicals and potash producer, finished another day in the red, ending the day Tuesday at $173.31 — despite a rip-roaring rally on the American stock exchanges. Between its 52-week high of $241.62 and today’s intra-day low of $161.95, the stock has lost 30% of its valuation.

I said it before and I say it again, that’s not an intuitive price development for a company that saw its Q2 earnings soar 217% and raised its earnings outlook by 30% for the year.

Sure, there is a labor dispute. And one blogger has blamed “spammers” for spreading bad news about the stock. And some techie analysts have diagnosed a bearish “head-and-shoulders” pattern that doesn’t bode well for POT. Our old friend and frequent guest expert on TFN videos, Horacio Marquez correctly cites the slow eviction of ethanol trade players, the strengthening of the dollar, the falling of oil and commodities prices, as well as the prospective decline in energy-related inflationary pressures as reasons for the short-term price decline.

The trend appears industry-wide. Western Potash Corp. [TSE:WPX] has fallen from C$1.88 down to C$1.35, 33% since June, and 10% just today. Athabasca Potash Inc. [TSE:API] lost close to 12% Tuesday, closing at C$5.55, down alsmost 40% from C$9.21 in June. Agrium Inc. (AGU), too, lost almost 8% yesterday, closing at C$82.78, down 27% from C$114 in June.

We’re clearly not dealing with problems related to POT. We’re looking at trend reversal affecting the major players in the entire industry.

Since it is unreasonable to expect that China, Thailand, India, Vietnam and other boom nations will make do with less agricultural production in the current years, the financials of potash and other fertilizer companies will in all probability continue to look excellent — even if the ethanol fad will no longer play a role.

But as bulk shipping and oil exploration stocks have shown in this year, excellent spreadsheets are no protection against loss of favor with the short-term punters. A difficult position to be in, in a market that seems almost abandoned by long-term investors.

We will not re-enter POT this week but are looking for confirmation of the trend.

Disclosure: None

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This article has 32 comments:

  •  
    Aug 06 06:11 AM
    The big price drop in Jan ended in a new high. Earnings over next six months move stock to new high.
    Reply | Link to Comment
  •  
    Aug 06 07:47 AM
    You are right on about the reason for the decline in the stock of all the O&G, Coals, Steels its almost as if no one believes the outlook the CEO's of these companies talked about in their conference calls, I have listened to those calls and I found little reason for this selloff but one has to accept it and not keep blinders on. I have sold a few positions in commodities to lessen the pain as I dont know what the future hold. Its almost as painful as the internet bubble bursting.

    One thing to notice though is that while the dow and s&p were down day after day from march to end of june these stocks were riding high so there was already a disconnect from the market averages, that divergence for me holds no importance.

    The fast money was hiding in these stocks waiting for the bottom in Financials and the other undesirables. No they are long stocks that are bleeding money and have bad balance sheets and forsaking the good.

    I am with Meridith Whitney and Ken Heebner, there is more pain ahead for the groups I like but when the financial stocks, and housing tech fall from favor hedge funds will find their way back (This rally isnt real, S&P has topped out at 1280 range three times in a month, either it will break upwards or breakdown and my guess is down because of the fundementals).

    People think its good for the market if OIL goes down, but thats not true, what that will indicate is that there is less demand for oil and other commodities. This would signal a global slow down which is bad for your multinationals who are doing so great (tounge and cheek due to weak dollar). That brings me to my final point $DXY is at the big resistence level, its no coincidence that commodities i.e. OIL are at major support levels, we will see what gives.


    Long SKF, SRS, SDS, QID and and oil, coal, Ag, steels
    Reply | Link to Comment
  •  
    Aug 06 07:50 AM
    Correction: "I am with Meridith Whitney and Ken Heebner", bearish housing and financials and bullish AG, Steel, Oil etc
    Reply | Link to Comment
  •  
    Aug 06 08:17 AM
    POT is starting near its 200 day moving average today. Its fundamentals say it should bounce upward. AGU reported a great beat today. That's a positive. Oil futures are up slightly, and grain futures are mixed to up. The US petroleum stocks info is due to be reported at 7:30am PST or 10:30 EST today. It seems likely this information may determine the final outcome of the Ag stocks today. I am hoping that outcome is up. I would feel a lot better about the markets in general if POT rallied from its 200 day moving average.
    Reply | Link to Comment
  •  
    Aug 06 08:20 AM
    Good review by J Cristoph on the sell down of hot stocks. I have also given up good gains and then taken some losses when I belatedly sold my fertilizer and O & G stocks about 2 weeks ago. I have since decided to modify my trading strategy to not simply hold Warren Buffet style based on conviction but to have stop loss and sell stop TURTLE style. I can't say buy and hold or TURTLE trading is better, for me I find it practical to trade [despite the inevitable drawback and advantages of any any particular strategy].
    Reply | Link to Comment
  •  
    Aug 06 08:39 AM
    I do not understand the apparent relationship between the share price of POT and the price of oil. POT seems to track the price of crude. Potash is NOT even a commodity contrary to what some mistakenly believe. A commodity has futures; potash does not. So why the apparent tracking of POT and oil?
    Reply | Link to Comment
  •  
    Aug 06 09:04 AM
    I think you are all missing the point. Hedge Funds were in a basket of stocks that are ini the Ag, Metals, Mining, oil and gas exploration and Services while the financials, tech, housing and retail were beat down like a pauper trying to steal a scone in the streets of england on a rainy cold day. They have just pulled the money out after the Fed bail out to see if this is the fifth bottom in the credit melt down, read Doug Kass and Meridth Whitney who were the only people on Wall Street that wrote about this mess (and Ron Insana)
    Reply | Link to Comment
  •  
    Aug 06 09:05 AM
    POT is in a commodity business the same as the oil companies. The market believes the commodity rally is over and selling all commodity based stocks. As one of the most visible companies in the sector, POT is subject to continued selling pressure as long at commodities in general: grains, oil, metals, continue to erode. It is not inconceivable that POT could fall to 5 times 2008 earnings. Many financial companies with no exposure to the mortgage problems and continuing good business fell to less than 5 times earnings before the recent rally.
    Reply | Link to Comment
  •  
    Aug 06 09:26 AM
    If any of you think that the sell off of Agriculture stocks has anything to do with
    farming , you are wrong--it is all about
    trying to save the financials What a joke
    the American banking system has become.
    Reply | Link to Comment
  •  
    Aug 06 10:15 AM
    user 195550: I agree 100%, I refer you to my earlier post
    Reply | Link to Comment
  •  
    Aug 06 10:44 AM
    The oil stocks numbers today are a wash. Gasoline stocks were way down. However, crude and distillates were up. All told the difference was negligible. This should allow a rally to continue if it wants to. So far, it looks like POT is rallying off its 200 day moving average.
    Reply | Link to Comment
  •  
    Aug 06 10:48 AM
    grains and oil futures are now mostly up on the day. This too is good for a rally in POT et al.
    Reply | Link to Comment
  •  
    Aug 06 11:45 AM
    Dollar break out killing oil and the rest of commodities
    Reply | Link to Comment
  •  
    Aug 06 01:05 PM
    Well, the low peak averages are still slowly drifting higher.
    which combines with a profitable company with sound management
    practices, makes for a long term strategy.

    Of course the ups and downs put day traders into arrythmia...
    Reply | Link to Comment
  •  
    Aug 07 07:11 AM
    Today the oil and mining stocks in the UK rallied. Oil and grain futures are generally up today. This would tend to make one think that POT and the other Ag stocks will rally today. POT is likely still going to rally off its 200 day moving average. Its earnings for next quarter are close to a lock. They will be stupendous. They will beat again. This means that POT will have a PE (at its current price of about $180) of 19. Its historic PE over the stock's lifetime has been 19.8. It is still in a high growth period. It expects to significantly increase it potash production in the next year. It looks like prices are still increasing. Certainly the recent price increase by Canpotex has not met any resistance. The fundamentals on this stock are excellent. It is slated for about 300% growth this year (2 quarters of which are still to come). Then it is slated for 70% growth in 2009. At a price of $180, the PE for 2008 earnings (currently and fairly assuredly predicted to be $12.68 or better) will be 14.2. This is for a stock that will be a 70% grower in 2009. An appropriate PE at that time would likely be 25-30. This would mean the price would have to roughly double by then. The CEO has said publicly that he sees no signs of weakening in pricing power. He instead sees this as a strength in the business for the next couple of years at least. He would not say this pubtlicly if he did not strongly believe this to be true. It would engender lawsuits by stockholders if found to be false. It seems highly likely it will not be found false. Bill Doyle comes off as a very conservative, respectable, competent businessman. Further other companies cannot add potash capacity as cheaply as POT. Therefore POT's margins will continue to be great, and more than competitive. The stock has fallen a lot recently (roughly from $240 to a low of around $170). That's quite a hit. A bunch of naysayers are trying to scare people out of the stock so they can get a big ride down (then a big ride up). However, these people still seem to be in the minority. Most of the analysts seem still to have integrity. The current average analyst rating (Yahoo Finance) is 2.1. Ford Equity Research, which is fairly good at analyzing short term (and long term) price performance rates it a "strong buy" with great short term potential. Standard and Poors, a very conservative rater, gives it 5 stars. This is not a stock that is going in the tank. It could conceivably go down further in sympathy with commodity prices, if those continue their recent decline. However, its fundamentals are so strong, it seems likely they will be recognized before the commodities hit bottom. The likely bottom for oil this year is predicted to be in the $90 - $100 range. It is unclear that that will come this summer. A week or two ago the Fast Money guys were predicting $135 oil for September. This sounds like a rise in oil from the current price. Perhaps they have adjusted their thinking. However, it is again a little less relevant.

    Fertilizers are used to provide food. The fast growing economies are with virtual certainty going to demand more food in the near future (even with a relative recession). The US and Europe are hardly likely to demand substantially less food. This means that fertilizer suppliers should have the pricing power that Bill Doyle has been saying they have even going into the future. This stock is technically (rallying from its 200 day moving average) and fundamentally (from its valuation fundamentals) a big buy at this point. You could be wrong if you buy this stock at this point, but it is unlikely you will be very far wrong. The ethanol mandate repeal scare (for the US only) has no real teeth. First it likely will not be repealled. Second even if it is only perhaps 1-3% of POT's business is related to corn for ethanol growth in the US. With POT's current growth rate, the stock can absorb this without much trouble. Other ethanol makers such as Brazil are longer term ethanol producers and users, they are likely to keep producing it for their own uses, if for no other reason. There is no realistic reason to be scared. If you buy now, there could be a little further dip if commodities continue to tank in the near term. However, POT rallied off its 50 day moving average in the Mar. and Jan. market lows earlier this year. The fact that it is not significantly below its 50 day moving average is very bullish in that sense. It now seems likely it is rallying off its 200 day moving average. You might take a little hit by further downward movement, depending on a number of other market factors and market sentiments. However, this stock is unlikely to go much further down in the short term. The fundamentals are too strong. It cannot be compared to other great falling stocks at this point. The fundamentals for food production are too strong at this point. They are likely to continue to be strong for the next 5 years if not more. This could be the biggest bull market of the next 5-10 years. If you don't buy now, you may miss a huge near term up move to $250-$260. The average one year price target for the stock is $305 currently. This has been rising as the stock has gone down recently. This is an extremely bullish sign.

    Considering today only, oil and grain futures are generally up. The UK mining and oil stocks rose there earlier today in their time zone. It looks very likely that POT and the other Ag stocks will rise today in the US markets. Probably stocks like CLF, which have also taken big hits recently, will too. Good Luck with your trading. It is looking to me like this may be the near term bottom for POT. Even if it is not, the risk reward still says buy. You risk losing a huge, quick move up by trying to avoid a possible (but unlikely) much smaller possible move to the down side. The ethanol mandate repeal scare is a non starter. It is a hoax being perpetrated by stock manipulators. The ethanol mandate cannot even if repealled have a large effect on POT. Food demand is still high. It stays high even in recessions. There is not a prediction that the BRIC countries (and other fast growing economies) appetites for food will lessen in the near future. The predictions are still for growth in worlwide demand in the food arena, even if there is a worldwide recession (or slowdown). This could well be the best time this year to buy POT.
    Reply | Link to Comment
  •  
    Aug 07 07:17 AM
    Sorry there was a type above. I meant to say that POT is "now" (not "not") significantly below its 50 day moving average.
    Reply | Link to Comment
  •  
    Aug 07 07:28 AM
    I should further not that the stocks of potash currently are very low relative to previous years' statistics. The potash producers are having trouble supplying the demand (i.e. there is a relative worldwide shortage of potash currently). This does not make one think there is significant downside potential in the potash producing stocks, especially ones with good fundamentals.
    Reply | Link to Comment
  •  
    Aug 07 08:00 AM
    David White: Get your own blog. You write more than the author does. We don't need a minute-by-minute update on the price of POT.
    Reply | Link to Comment
  •  
    Aug 07 08:36 AM
    SPY is now down .99 (the equivalent of about 100 DJIA points). Still Oil and grain futures are well up today. Assuming these continue to be up (or rise further), POT and the other Ag stocks should be able to buck the market direction today. They should rise with rising commodity prices.
    Reply | Link to Comment
  •  
    Aug 07 08:43 AM
    One really bullish piece of news for the market this mornign was the sales results from ARO. ARO also raised its guidance significantly for this quarter. Same store sales were up 13% for July.
    Reply | Link to Comment
  •  
    Aug 07 08:45 AM
    The initial jobless claims were higher than expected this morning (455K vs expected 420K).
    Reply | Link to Comment
  •  
    Aug 07 08:47 AM
    JCP same store sales were down, but apparently they were better than expected. JCP raised their Q2 view to $.50-$.52 from $.38. Again good news.
    Reply | Link to Comment
  •  
    Aug 07 08:51 AM
    Basically the store sales seem about as expected. The department stores are getting hit, while the discounters generally are doing well. There are some exceptions such as GPS, URBN, and ARO, which did significantly better than expected.
    Reply | Link to Comment
  •  
    Aug 07 08:55 AM
    GPS (the GAP) same store sales decreased, but they were higher than expected. GPS raised its guidance for the FY by 8-10 cents. Since GPS and JCP haven't done anything really exciting lately, this is a bullish sign for the market.
    Reply | Link to Comment
  •  
    Aug 07 10:03 AM
    Apparently AIG's $5.4 billion loss on mortgage debt was a big downer for the market. The Initial Jobless Claims rise didn't help either. Ditto a bit of a down outlook by Walmart. Still oil and grains futures are up, so the Ag stocks should rise, especially from where there are at this point in the day. This could be fairly important to the near term performance of POT et al. If they can sustain the small uptrend from yesterday, they may go screaming back up. If not, they may still have further downside first. I am hoping for the former.
    Reply | Link to Comment
  •  
    Aug 07 11:19 AM
    AGU got a reiteration of a buy rating from UBS today. This is generally good for Ag stocks.
    Reply | Link to Comment
  •  
    Aug 07 01:59 PM
    David you keep missing the point, any rally in the commodities is sold off due to rising dollar, Did you miss the ECB statement today? Dollar is now above its 200dma and dollar is up big agaisnt other currencies. Even though i'm still long coomodity plays I fear the rally is over, even the debacle at AIG, and various other financials trigger a relocation of funds into the better growth stories as you mentioned above. This is a bad sign as I have been posting for days, Great news , Great earnings big correction, smslls like a top, PE contraction phase. Raising cash again today!
    Reply | Link to Comment
  •  
    Aug 07 02:42 PM
    There's simply too many retail traders hanging in the ag sector. The story is too easy. Hedge funds know this so they are trying to shake the share renters. This sector is in the hole for a while. Better brace for some pain but the worst thing you can do is sell.
    Reply | Link to Comment
  •  
    Aug 07 04:06 PM
    After all was done today, POT was down slightly, but the bounce off of the 200 day moving average was still intact. Actually POT was down less than the market on a percentage basis. This was a mildly positive sign. It gives another indication that POT may want to head upward in the very near future.
    Reply | Link to Comment
  •  
    Aug 07 09:52 PM
    Well the EPA today said the ethanol requirement stays in place.
    So more corn means more fertilizer means more profits.
    which means: looking at this weeks POT quotes = less money per share..... Go figure. Logic doesn't play into the stock market anymore.
    Reply | Link to Comment
  •  
    Aug 08 02:50 PM
    the market no longer cares about things like earnings, profits, future expectations, great managment or the fact that these AG ibnvestments seem to make more sense than a failing bank. However, the money goes to the failing bank instead of the AG who is killing earnings and expectations. The market IS manipulated... the hedge funds and "intra-day traders" control the market. it deosnt matter who makes what for what reason...it only matters where the big money desides to park it self... what they decide will go up will go up...what they decide to "crush" will be crushed...

    "deserve got nothin' to do with it"
    Reply | Link to Comment
  •  
    Aug 08 09:40 PM
    Gentlemen, and Women investors. As a canuck into POT and AGU from the start, you really couldn't find a better opportunity to invest in both of these now. I have, heavily. I have made enormous gains swing trading them both. They have saved my portfolio during bears several times. The graph is your arbiter, sentiment on agriculture stock is nonsense. A growing world population needs food. Period.
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