Potash Corp. Stock Undervalued

Potash Corp. of Saskatchewan’s (POT) decision to increase its share buyback program to as much as 10% of the public float, or 31.5 million common shares, means it can repurchase another 15.7 million, or 5%, by the end of January 2009. CEO Bill Doyle said strong cash flows allow the company to re-invest in the world’s best potash assets – PotashCorp. itself, calling the stock “significantly undervalued versus our long-term potential.”

Citigroup analyst Brain Yu agrees, calling the recent sell-off in materials “indiscriminate” and noting that Potash is trading at its lowest multiple in its public history. He reiterated his “buy” and “top pick” ratings for the stock along with a $264 price target that implies upside of roughly 75%.

In a research note, the analyst said:

While we understand the demand linkage between industrial metals and global economic growth, our recent analysis of nearly four decades of global grain demand data indicates that grain demand has rarely declined year-over-year absent a major supply shortfall.

Mr. Yu noted that global grain inventories that now stand at 16.6%, or 8.6 weeks, leave little room for further downdown. He said that if grain prices fall materially, farmers should buy less fertilizers. At the same time, grain production may also decline on an annual basis, which implies that inventories fall and prices could then climb back to elevated levels.