Is Potash a Buy?

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Potash prices are controlled by two cartels: a Russian joint venture controlled by OAO Uralkali; and the Canadian cartel Canpotex.  Today, Uralkali announced that is was pulling out and was going to price its Potash independently (i.e., more cheaply).  This makes sense for Uralkali because it can produce potash more cheaply than Canadian suppliers.  World demand has fallen and Uralkali can potentially take significant market share to maintain its profits while reducing its margins.  Canadian suppliers have a higher cost of production and will struggle to match Uralkali’s prices.  This sent the price of Canadian potash producers tumbling today.  Potash Corp. (POT.TO) was down over 20% intraday, and closed down 16%.  Mosaic (MOS) was similarly hammered.  So, is this a buying opportunity?

Screen Shot 2013-07-30 at 5.27.14 PMI analyzed the stock using my usual procedures. The results are as follows.

  • The P/E Ratio is 12.47, which is much lower than the average historical P/E of 20.29, and the Graham Number is $26.33
  • The Dividend Yield is 4.41%, but the coverage is only 181%
  • Forecast Growth Rate is marginal at 7.83%, compared with 46.05% historically, which is likely why the P/E Ratio is lower than its historical average
  • The Gordon Return (Dividend + Growth) is 12.25%, which is good.
  • The Margin of Safety at current prices is negative, meaning that the price is well above the stock’s current value. To provide a MOS of 10% or more the price would need to fall much further to $25.  Also, the news described above is likely to result in a reduction in future earnings estimate, making the stock even worse value than calculated here.

Potash is not good value, even after today’s drop.

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