Potash Corp. of Saskatchewan (NYSE:POT - News) hit a grand slam Thursday, smashing first-quarter views amid soaring demand for its fertilizers. But its shares sold off 5% as the booming agricultural sector took a breather.
The fertilizer dynamo earned $1.74 a share, up 181% vs. a year earlier and 22 cents above Wall Street forecasts. Revenue surged 64% to $1.89 billion. Potash also raised its 2008 earnings guidance.
The world's largest fertilizer company by capacity, Potash Corp. produces the three primary plant nutrients. It is No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.
"The key driver for the quarter was really offshore demand for potash, which was up 23%," CEO Bill Doyle told IBD. "And we had record gross margins in all our products due to the very strong demand for fertilizer around the world in response to the food shortage."
'Tremendous Growth' Ahead
Potash Corp. has been on a long winning streak, a trend that Doyle expects will continue.
"We think there's tremendous growth in front of us," he said. "We think we're at the beginning of an earnings explosion. We are the only company in our business that can bring on idle capacity, because we have it and no one else does."
Potash is the company's biggest earnings contributor. The product generated close to half of the company's 2007 gross margin.
"We have a case where world demand is close to, if not outstripping, the supply of potash," said Tom Stundza, executive editor of Purchasing magazine. "Worldwide demand for food and other agricultural commodities has created this boom market for fertilizers and the chemicals that make fertilizer. The buying community is pretty much trying to keep up with what's needed out there."
Separately, Brazilian oilseed processor and fertilizer producer Bunge on Thursday also beat first-quarter views, buoyed by the same tail winds of record demand and prices for agricultural products. Bunge shares, down early, rallied late to close 1% higher.
Shares of CNH Global tumbled 17% after missing first-quarter earnings forecasts. Analysts said woes at the world's No. 2 farm equipment maker were company-specific, but they helped trigger a sectorwide bout of profit-taking.
"These shares have been up for a long time, and there's a point 14 time when some investors want to take some of their money off the table," said analyst Bill Selesky of Argus Research. "But the long-term prospects for the commodities companies look good."
Priceless Potash
The main growth driver for Potash is rising prices of all three of its products, said analyst Brian Yu of Citigroup. In the first quarter, the spot price of potash averaged 92% higher than in first-quarter 2007, phosphate prices were up 143%, and nitrogen prices rose 54%, Yu said.
Like many of its peers in agriculture-related sectors, Potash is getting a big boost from high crop prices. Prices of many key crops -- corn, wheat and soy -- are near or at all-time highs.
As a result, farmers have the incentive and the means to buy more fertilizer to grow more crops, said Yu.
That's pushing up prices of fertilizers, which have a finite source of supply, Selesky said.
He expects the strong demand for fertilizer to continue.
"It goes with the ups and downs of the crop cycle and global food demand," he said. "I don't see any of those trends slowing. With respect to crop prices, we think there's a secular change that will last for years."
CEO Doyle also sees the global agricultural boom continuing.
He notes that hundreds of millions of people in places like India and China are moving from starch-based diets to protein-based diets, including meat. It takes far more grain to produce meat to feed a family than it does for a family that simply eats grains.
Farmers will need fertilizer to grow those extra crops, Doyle said.
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