Is Potash Corp of Saskatchewan A Buy?

Excited about investment opportunities in the global agriculture industry? Potash Corp./Saskatchewan (NYSE:POT) is one way to play that thesis. The large producer of potash, an important ingredient in fertilizer, also sells phosphate- and nitrogen-based fertilizers directly. Read our guide to the fertilizers and agricultural chemicals industry. In the long term, a rising population- as well as an average diet more heavily composed of meat products, which require higher crop production- should drive agricultural demand higher, and therefore lead to higher fertilizer sales. So far this year, however, the stock is down 8% against a rising market.

Potash Corp./Saskatchewan’s third quarter ended in September, with the company’s 10-Q reporting a decline in business compared to the same period in 2011. Revenue was down 8%, in line with the company’s results from the first half of the year. Costs were about even last quarter with the third quarter of last year, and earnings therefore dropped 22%. Cash flow from operations was also down.

Millennium Management, Catapult Capital Management

With the decline in the stock price, Potash Corp.’s market capitalization is about $35 billion. Even with the corresponding decrease in earnings, this places it at a trailing P/E multiple of 15. Generally, we’d want to see at least modest near-term growth to go along with a trailing multiple in the mid-teens, but a long-term investor might be satisfied with the growth prospects inherent in agriculture. Wall Street analysts expect that the company will see EPS growth in 2013, and based on their estimates Potash Corp. is trading at 11 times forward earnings. The company also pays a moderate dividend yield of 2.1%, following the second increase in its dividend in the last year.

Adage Capital Management, managed by Phil Gross and Robert Atchinson, reported ownership of 6.4 million shares of Potash Corp./Saskatchewan at the end of June. Gross and Atchinson had previously worked for Harvard Management; the endowment actually owns a minority stake in Adage (find more stocks owned by Adage Capital Management). Billionaire Israel Englander’s Millennium Management sold the stock over the course of the second quarter but still owned about 600,000 shares (see what stocks Millennium Management was buying).

Fertilizer manufacturer Mosaic Co (NYSE:MOS) and wholesaler and retailer Agrium Inc. (NYSE:AGU) are good peers for Potash Corp. These companies have even lower trailing P/E multiples than Potash Corp. does: Mosaic trades at 12 times trailing earnings and Agrium’s trailing P/E is 11. Mosaic’s earnings were down 18% in its most recent quarter compared to a year earlier, and its revenue dropped at a similar rate. Given that it’s cheaper than Potash Corp., it might be a better buy. Agrium has been growing- both its revenue and net income grew at a double-digit rate last quarter over the same period in 2011- and trades at only 10 times forward earnings estimates. It looks to us like a good value stock.

Investors who are interested in agriculture could alternatively get exposure to trends in the industry by buying agriculture technology companies Monsanto Company (NYSE:MON) or Syngenta AG (NYSE:SYT). Each of these stocks has beaten the market over the last year. With market optimism, each trades at a premium to Potash Corp. and the other fertilizer-focused companies: Monsanto and Syngenta trade at trailing P/E multiples of 21 and 23, respectively. Monsanto had lower revenues last quarter than it did a year ago, so combined with its valuation we would avoid it in favor of these other stocks. Syngenta had its earnings rise 5% off of a similar increase in revenue; it looks better to us than Monsanto, but Mosaic and Agirum are still considerably cheaper.

Agrium’s pricing doesn’t look too bad for an investor looking to buy an agriculture-related stock. However, other fertilizer-related companies such as Mosaic and Agrium seem like more attractive investments.