Potash With A High Profit Margin

Potash Corp. (POT) has benefited from higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. Rising fertilizers prices, especially potash, will expand POT’s margin in the second half of 2008 and 2009.

The company is expanding potash production capacity by 2.7 million tons to cater to the growing fertilizer demand. The company’s manufacturing plants are located in low-cost areas and its financials are solid. The management raised EPS guidance for 2008 from $9.5-$10.50 to $12-$13 expecting an EPS of $3.25-$3.75 in the third quarter of 2008. Hence, we rate the stock a Buy with a target price of $200.

In the second half of 2008, Potash Corporation plans to increase potash prices by $400 per ton in the North American markets. Substantial increase in potash prices coupled with rising nitrogen and phosphate prices due to rising input cost will result in higher realized prices. This in turn would drive revenue growth in the second half of 2008. The company has excellent free cash flow.

On September 8, Potash Corporation announced that on September 5 it purchased 500,000 of its outstanding common shares following a private agreement between itself and a third-party. The company stated that the purchase brings the total number of shares purchased under its 15.82 million share repurchase programme to 15.15 million shares.

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