Potash Retained at Neutral (BASFY) (MOS) (POT)

We are maintaining our Neutral recommendation on the world's largest fertilizer company Potash Corporation of Saskatchewan Inc. (POT). The Canada-based company posted mixed results in second-quarter 2012 with adjusted earnings narrowly missing the Zacks Consensus Estimate while revenues beating the forecast.

Profit, as reported, slid 38% year over year, dragged down by a hefty impairment charge associated with the company’s investment in Sinofert Holdings Limited. Revenues rose 3%, aided by higher potash demand. The company sniped its earnings target for 2012 factoring in the impairment charge.

Potash Corp., which competes with BASF (BASFY) and Mosaic Co. (MOS), has a competitive advantage stemming from its mining rights to the world's largest potash reserve. The company has a strong geographic diversification and continues to invest in expanding its operational capability in potash.

While there is uncertainty surrounding the U.S. economy and the sovereign debt crisis in Europe, the strain on the world's food supply is driving strong demand for all three nutrients of the company, especially potash.

Given the tight potash supply in North America, Latin America and spot markets in Asia, the demand for potash is expected to rise as buyers are now seeking to secure the product. Potash Corp. expects this trend to continue in 2012.

With more than half of the world's estimated new supply coming from its projects between now and 2015, the company believes that it can capture a significant share of demand growth over the next several years.

Potash Corp., like other major fertilizer companies, is poised to gain from the severe U.S. Midwest drought. High crop prices (especially for corn) and tight inventories resulting from the drought are expected to create significant demand for its crop nutrients, especially potash. Both demand and shipments of potash are expected to strengthen in the remainder of 2012.

However, the company is exposed to macroeconomic uncertainties and other issues such as price volatility and currency exchange fluctuation. While need for potash is significant in major developing economies like China and India in the long run, a few short-term challenges across these markets may impact the near-term demand for fertilizers.

The Indian government's move to trim potash subsidy levels coupled with higher retail pricing resulted in lower demand in that country. As a result, the company has scaled back its potash demand outlook for India for this year.

Potash Corp currently retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.