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Are Potash Corp./Saskatchewan (USA) (POT) Earnings a Bad Omen for Fertilizer Producers?

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So much for mitigating risk across a diverse business. Potash Corp./Saskatchewan (USA) (NYSE:POT) delivered dismal earnings, reduced its full-year outlook by $0.30, and announced that it would cut production at two mines to balance supply. Potassium sales volumes were solid for the quarter, but weaker than expected Indian and Chinese markets muted what is normally the strongest quarter of the year for the industry.

The company’s Allan mine was recently expanded. Image courtesy of Potash Corp./Saskatchewan (USA) (NYSE:POT). Weakness was observed in all three major nutrients — nitrogen, phosphate, and potassium — which doesn’t bode so well for the peer group, either. All around it wasn’t a very strong quarter for Potash Corp./Saskatchewan (USA) (NYSE:POT). Is there any positive news that investors can take away? What, if anything, changes in the long-term outlook for the company and industry? Let’s dig in.

Financially speaking…
Shares dropped over 5% in intraday trading on the bad news, but recovered to close down just 1.3%. Still, investors have good reason to be shocked. Potash Corp./Saskatchewan (USA) (NYSE:POT) earned just $0.73 per share on revenue of $2 billion, whereas expectations called for earnings of $0.80 per share and revenue of $2.15 billion. That prompted management to cut full-year earnings guidance from $2.75-$3.25 per share to just $2.45-$2.70 per share. I’m not the biggest fan of Wall Street predictions, but slashing guidance is not a best-case scenario.

On a brighter note, management announced a $2 billion share repurchase program — representing about 5% of outstanding units — that will be completed in the next 12 months. You may not be thrilled about that allocation of capital, but you’ll like the fact that a focus on efficiency has paid off dramatically. In fact, only 12% of major capex projects are incomplete. The portion of completed projects allowed Potash Corp./Saskatchewan (USA) (NYSE:POT) to rake in a record $1.9 billion in the first six months of the year from operating activities.

Even with year-over-year improvements, the total gross margin came in at $220 million, or 18%, lower than last year’s second quarter. In other words, if the recent push to upgrade production capacity and efficiency coincided with higher market prices for nutrients, then the company would be staring at record profits and revenue right now. That’s good news for investors down the road.

Foreign market mystery
Despite growing consumption in India and China — two of the world’s most important agricultural markets — the industry is having a difficult time selling to farmers in both countries.

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