Watch Potash Grow

The steep selloff in the fertilizer maker's stock has been wildly overdone.

SHARES OF Potash Corp. of Saskatchewan (ticker: POT) have plunged by about 25% in just the past week and a half. The world's largest maker of potassium-based fertilizer has cut production and capacity drastically in the face of a global recession and has suffered as traders book profits on recent gains made in the commodity complex.

Moreover, commodity prices fell sharply Monday after the World Bank cut its 2009 projection for world growth to a decline of 2.9% from a decline of 1.7%. And on Sunday, the International Monetary Fund's director said the IMF expects to cut its world growth outlook.

But make no mistake. The tiniest of green shoots might nourish the fertilizer maker's outlook. After gaining $2.76, or 3%, this morning, to $90.03, the stock fetches 14 times this year's expected $6.44 per share, and nine times 2010's $10 estimate.

The industry, including Potash, built up capacity enormously last year after several years of tight supply. That, along with rising fuel prices (natural gas is the biggest cost of production for Potash), was passed along to farmers in the form of a doubling of potash prices.

When the crisis hit, farmers, unable to get credit, held off on fertilizer use, idling capacity for Potash and everyone else.

Barrons.com writer Naureen Malik deftly anticipated Potash's fall, going negative on the stock in April of 2008, and then suggested picking up the shares around $69 last October, which turns out to have been a very good call.

There's room for more upside from here.

But Potash and the industry have been cutting production dramatically, and when an eventual upturn comes, economics can work in Potash's favor.

Just look at the first-quarter income statement for the three months ended in March: Sales fell 51%, while natural gas and transportation and freight costs all fell less sharply, resulting in a 73% year-over-year drop in gross profit. That implies profit can surge when farmers buy again, and buy they will.

Fertilizer is a global business, and food production can be expected to rise with global population growth and with economic development. Agriculture is expected to remain fairly robust in the coming decade according to the U.N.'s Organization for Economic Cooperation and Development, which put out a tome on the matter last week.

This is why it's important that Potash has investments in businesses in China, Chile, and other parts of the developing world, where fertilizer can help yield more from crops, from which everyone, producers and consumers alike, should benefit.

While the company expects fertilizer use to drop by 20% in the U.S. market, China, for example, is expected to increase fertilizer use this year.

After cutting 5.5 million tons of annual production since August, Potash's capacity is just one-fifth of the 47 million tons the entire fertilizer industry is expected to ship worldwide this year. That means tight supplies could cause prices to surge again when fertilizer use picks up, feeding Potash's cash flow.

With $2.8 billion in debt and $255 million in cash, Potash not only has the balance sheet to hold out till the market rebounds, it should be able to support its modest 10-cent-per-share dividend, which has steadily risen over the last two decades.