Potash Corp. Update: Time To Buy?

I wrote earlier that I'd once again look at Potash of Saskatchewan (POT) if it got to $150. It was just over $151 today. Since I first wrote about POT at the end of July, a number of negative events mentioned as risks in that earlier post transpired.

1. A strike commenced at three of the company's potash mines. The company's strike updates are here.

2. Grain prices have fallen, as has the price of oil.

3. Sulfur prices have risen.

As POT's competitors, like Mosaic (MOS), have also suffered steep declines in their share prices, the strike doesn't seem to have much of an effect so far (and might not have an effect at all). It's falling crop and oil prices that have pushed the stock down.

Fertilizer prices, meanwhile, seem to be on the rise. Potash has risen to $763 a tonne (1,000 kilograms) in July from $525 in June, according to Globe and Mail. Just recently, China raised the export tax on urea and ammonia to 150%. This should boost nitrogen fertilizer prices worldwide.

The analyst consensus for POT's 2009 earnings stand at $21.29 a share, which has increased by a cent from a month ago. The low estimate is at $15.50 a share. POT is currently trading at just above 10 times the lowest earnings estimate for 2009.

The rising sulfur prices may crimp margins. The mine strike may result is lowered output. It is unclear if analysts have incorporated POT's output in their estimates or whether they are expecting earnings gains to come mostly from margin growth.

The world needs food now and will in the future. All the positive aspects of investing in POT that I mentioned in July are still valid. So POT looks like a pretty good long term investment here, though I will continue to wait for a lower price. If POT can meet earnings expectations, it's starting to look pretty cheap.

The biggest risk is the continued slide in crop prices. If you believe this isn't a deflating bubble but rather a short term correction in a much longer agriculture bull market, it may be a good time to start buying POT.