Potash Corp. of Saskatchewan Inc. (NYSE: POT) Is Reaping the Rewards of a Global Ag Boom
Not only are populations growing, but middle class consumers in emerging markets are developing a taste for meat as well. This insatiable hunger for more choices has resulted in greater demand for corn-fed livestock, which is taking a hefty chunk out of crop yields.
And when you include new biofuel demands, crops are now being used for feed, fodder and fuel.
Of course, there’s only so much arable land in the world, so fertilizer has become one of the primary drivers of increased crop yields.
When it comes to capitalizing on this evolving trend, Potash Corp. has the size and global diversity to dominate. That was clearly evidenced when the company reported record earnings in the second quarter.
So it’s time to buy Potash Corp. of Saskatchewan Inc.(NYSE:POT) (**).
Potash Corp.’s Record-Setting Second Quarter
Potash primarily mines and sells fertilizers in the United States and Canada. Its primary products are potash, phosphate and nitrogen-based fertilizers.
The Saskatoon, Canada-based company holds the right to mine 785,759 acres of land in Saskatchewan and 58,263 acres of land in New Brunswick.
Potash spent more than $7 billion over the last few years to ramp up its supply capacity. That was a smart investment, as record global demand has driven the company’s production to never-before-seen levels.
The company produced a record 2.6 million metric tons of potash in the last quarter. This gives Potash about 20% of the total global capacity.
Potash set a new record for second-quarter earnings as well, raking in $840 million, or 96 cents a share. That brought first-half earnings to a record $1.79 per share, which was 18% above the previous high set in 2008 and a 77% increase from the $1.01 per share earned in the first half of 2010. Potash expects to make $3.40 to $3.80 per share for the full year.
“The continuation of strong fertilizer demand combined with the limitations of global production, especially in potash, resulted in tight fertilizer markets and rising prices for our products,” said Potash Corp. President and Chief Executive Officer Bill Doyle in a statement. “With farmers committed to increasing yields and capitalizing on the unprecedented economic opportunity, we worked to keep pace with growing demand, which resulted in a record quarter for our company.”
Bottom line: The agricultural boom is a terrific opportunity for profit at a time of great uncertainty. I believe that so firmly I’ll be covering another agricultural company later this week in a Private Briefing. That company is making huge amounts of money selling tractors and heavy machines to farmers.
For now, though, stick with Potash.
Potash stock closed Tuesday at $59.05, up 1.08%. Its 52-week range is $44.22 – $63.97. The stock has a small dividend yield of 29 cents per share, equal to about 0.5%.
Action to Take: Buy Potash Corp. of Saskatchewan Inc. (NYSE: POT).
The volatility in global markets has had little effect on the global demand for food. That demand has delivered record earnings to Potash’s bottom line. This is exactly the type of investment we should be looking for in these tough market conditions.
Potash is large and its stock is highly liquid. Normally I suggest blending our entries and looking for pullbacks. But this time I am comfortable with just picking up a full position at current prices and using the options market if we want to generate additional cash flow from the position via covered calls later.
(**) Special Note of Disclosure: Jack Barnes has no interest in Potash Corp. of Saskatchewan Inc.
(**) Special Note of Disclosure: Jack Barnes has no interest in Potash Corp. of Saskatchewan Inc.
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company’s fund-information department – just as the Asian contagion infected the Asian tiger countries.
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its “Armchair Investors Who Beat the Pros” competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He’s now the author of the popular blog, “Confessions of a Macro Contrarian,” and his “Buy, Sell or Hold” column appears in Money Morning twice a week. In his BSH column last week, Barnes analyzedAllianceBernstein Holding LP (NYSE: AB).