On Sep 2, we downgraded leading fertilizer company Potash Corp. of Saskatchewan, Inc. (POT) to Underperform factoring in the weak price environment and a still challenging demand scenario in India.
Why the Downgrade?
Both revenues and earnings for second-quarter 2013, reported on Jul 25, miss Zacks Consensus Estimates. Revenues fell by double digits year over year, hurt by lower pricing across all three nutrients and competitive pressure. The company cut its earnings forecast for the full year taking into account the price decline.
Estimates for Potash Corp. are on the downswing following the release of the second quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 17% to $2.48 per share as most of the estimates were revised downward. On a similar note, the Zacks Consensus Estimate for 2014 has slipped roughly 24% to $2.48. With the Zacks Consensus Estimates for both 2012 and 2013 going down, Potash Corp. now has a Zacks #5 Rank (Strong Sell).
While Potash Corp. will benefit from strong geographic diversification and expanded operational capability in potash, it is exposed to macroeconomic uncertainties and price volatility. Average realized potash price fell 18% year over year in the second quarter as competitive pressure pulled down contract and spot market prices. Pricing pressure was also witnessed in the phosphate segment.
Moreover, Potash Corp. is seeing somewhat weak potash demand in India, a key market. Indian government’s move to trim potash subsidy levels coupled with higher retail pricing and local currency devaluation resulted in lower demand in the country. Adding to the problems is declining crop yields. These challenges may sustain through second-half 2013.
We also account for significant uncertainty in the potash market following the recent exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (BPC). Uralkali’s move has triggered industry-wide fear of a price war which may push potash prices down and put significant pressure on fertilizer makers.
Other Stocks to Consider
While we prefer to avoid Potash Corp., other companies in the basic materials sector with favorable Zacks Rank are Ferro Corp. (FOE), Minerals Technologies Inc. (MTX) and Sensient Technologies Corporation (SXT). While Ferro retains a Zacks Rank #1 (Strong Buy), both Minerals Technologies and Sensient Technologies retain a Zacks Rank #2 (Buy).
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