Potash Corp. of Saskatchewan (NYSE:POT - News) kept up its explosive growth, crushing second-quarter views Thursday as surging demand buoyed prices for its fertilizers.
The fertilizer giant earned $2.82 a share, up 220% vs. a year earlier and 21 cents above Wall Street forecasts. Revenue climbed 94% to $2.62 billion. The firm also raised its 2008 earnings guidance.
But shares fell 3%, extending recent declines after skyrocketing 819% from its June 2006 low to last month's peak.
The world's largest fertilizer company by capacity, Potash produces the three primary plant nutrients. It's No. 1 in potash capacity, No. 2 in nitrogen and No. 3 in phosphate.
"We are experiencing strong growth in demand and are capturing the value of higher prices in all three nutrients, especially in potash," said CEO Bill Doyle in a statement.
Fertilizer demand has remained strong amid the global need to up food production.
"There's intense global pressure to expand food production, which has led to this unbelievable surge in the purchasing of fertilizer," said Tom Stundza, executive editor of Purchasing magazine. "Limited supplies in China and India have made North American potash a prime commodity. It's obvious that demand is growing faster than supply increases."
Potash is the company's biggest earnings contributor. The product generated close to half of the company's 2007 gross margin.
In the second quarter, potash gross profit soared 240%, reflecting higher prices. The average potash price rose 122% in North America and surged 192% offshore.
"Clearly there's limited supply and tremendous demand for potash," said Charlie Rentschler, a vice president at Wall Street Access.
"These people are in the catbird seat. They control most of the new capacity being brought on for potash."
Separately, Brazilian oilseed processor and fertilizer producer Bunge (NYSE:BG - News) on Thursday topped second-quarter views, lifted by the same high demand and prices for agricultural products.
Potash Corp. has been enjoying a nice run. Sales and earnings growth has accelerated the past three quarters. Still, the stock has been trending lower the past several weeks.
"Recently I've noticed a lot of rotational shifts by portfolio managers out of the basic materials and fertilizers group and into the financials and retailers," said Bill Selesky, an analyst with Argus Research.
Selesky sees no slowdown in Potash's sales and earnings growth as it continues to benefit from strong demand for fertilizer.
"With revenue growth being so strong and the company having such a low-cost operation, it's been able to take sales results and turn them into better-than-average earnings per share growth," he said.
Like many agriculture-related firms, Potash Corp. is riding the wave of high crop prices.
In the second quarter, corn prices leapt more than 60% vs. a year earlier while soybean prices almost doubled. Soaring crop prices have provided farmers with record income and strong motivation to increase yields and acreage planted, says CEO Doyle.
"At the end of the day it's all about what they can extract from the people they sell to," added Michael Swanson, senior economist at Wells Fargo & Co. "Clearly, the market it's selling to can afford to pay much higher prices for nitrogen, potash and phosphate."
Selesky says the prospects for Potash Corp. remain bright.
"Even a global economic slowdown wouldn't affect food production or consumption too much," he said.
"We're seeing a lot of food production growth in many emerging economies. As local economies improve and people make more money, they'll get better diets and have better housing."
These trends should continue to play well for fertilizer companies, he adds.
"I don't see why it wouldn't continue its winning streak with these prices," said Rentschler.
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