Gross Margin Drivers at Potash Corp. (Part II)

In order to better understand Potash Corp. (POT), it's necessary to dig deeper down to the level of, what I call the gross margin drivers and what Potash Corp calls gross margin contributers. I agree ,of course, that they contribute, but I think they contribute so much that, they either drive the company forward, or hold it back, drastically. These drivers are not the mobile machine operators that work deep down in the Potash mines, but rather the impacts of volume and price modified by the cost.

Starting with Potash, in 2007, the total gross margin increase was 351.2 million as we know from part one. This number now needs to get broken down into it's four underlying parts. Volume contributed 215.6 or 52%; Price contributed 199.5 or 48%; "Other" contributed 0.7 or 0%, rounded down. These three parts add up to 415.8 or 100%. In order to get back to the starting number, 351.2, the cost (64.6) must then be subtracted.

The "other", I'm told, reflects net impact of volume/price/cost on purchased and miscellaneous products. All these numbers have to add up correctly, or your knuckles will get whacked with that ruler, and both your ears will get pulled by my 6th grade math teacher, like mine allways did, until I learned to get it right.

The nitrogen segment reported a gross margin increase of 220.5. This breaks down to 85.5 or 30% attributed to Volume; 194.5 or 68% for Price; 7.1 or 2% for "other" to equal 287.1 or 100% for the subtotal, minus the cost of (66.6) to get back to 220.5. Meanwhile, the Phosphate segment reported 307.5 in gross margin increase, which gets broken down to 27.7 or 8% for Volume, 315.0 or 91% for Price, 3.6 or 1% for "other" to equal 346.3 or 100% for the subtotal, minus the cost of(38.8) to get back to 307.5. The combined segments are not relevent here, so they are just left out. The totals for the three segments are 328.8 or 31% for Volume, 709 or 68% for price, and 11.4 or 1% "other" to equal 1049.2 for the subtotal, minus 170.0 in cost to equal 879.2 or 100% of the total gross margin increase in the year 2007, a number mentioned in part one.

So, what do all these numbers tell us? Among other things, the curious fact that in the year 2007, the primary driver of the Potash segment increase was attributed to Volume not Price. Yet, all the big, bad Potash bears and bulls (I might add) have been telling us all along, that it's all about the price of Potash, while the volumes of Potash in 2007 have never even been mentioned! Simply amazing. What do these Potash bears and bulls eat for breakfast? Does anyone got a handle on that? The big price driven increases, once again never mentioned, were in Nitrogen and Phosphates, not Potash. What happened to the big Nitrogen and Phosphate bubbles?

Comparing apples to oranges to bananas, the Potash share of the total volume increase is 65.5%, Nitrogen 26%, and Phosphates 8.5%, to equal 100%. The Potash share of the total Price increase is 28%, Nitrogen 27%, and Phosphates 45%, to equal 100%. The "other" consists of 6% to Potash, 62% to Nitrogen, and 31% to Phosphates to equal 100%. So not only did Potash volumes drive the Potash segment increases, they also drove the volume increases of the entire company. In Price, it's Phosphates that was the primary driver, for the whole company. In the "other" department, it's Nitrogen that's in the driver's seat. So what kind of a company is this anyway? All we hear about is Potash.

Please notice that the percentages in the Nitrogen segment, apples to apples, closely resemble the percentages of the whole company. That means that the Nitrogen segment's effect is "neutral" when compared to the to the whole company, and can therefore be left out, in an apples to oranges comparison. Therefore comparing Potash to Phosphates, 89% of their COMBINED volume segment increases goes to Potash, while 11% goes to Phosphates. Price increases gets divided up into 39% for Potash, and 61% for Phosphates. The "other" increases go 16% to Potash, and 84% to Phosphates. So, what is driving this company?

By taking the total amount of 879.2 in gross margin increases in the year 2007, and breaking that down into the nine different drivers you get : 1) Phosphate Price at 315.0 or 30% 2) Potash Volume at 215.6 or 20%, 3) Potash Price at 199.5 or 19% 4) Nitrogen Price at 194.5 or 19%, 5) Nitrogen Volume at 85.5 or 8% 6) Phosphate Volume at 27.7 or 3%, 7) Nitrogen "other" at 7.1, 8) Phosphate "other" 3.6, and lastly 9) Potash "other at 0.7. The last three add up to 1% to equal 100%.

In light of all this, I have just one more question to ask, and will someone please answer. Is the market pricing this stock correctly or not?