Potash Downgraded Post-Report

The world’s largest fertilizer producer, Potash Corporation of Saskatchewan Inc. (POT - Analyst Report), earned 82 cents per share in the third quarter of 2009, within its previously announced guidance of 80 cents to $1.20. Earnings were slightly better than the Zacks Consensus Estimate of 81 cents while it declined 79% from $3.93 per share reported in the same period of the previous year. The shortfall was based on lower demand and weaker fertilizer pricing, especially nitrogen and phosphate.

The reported quarter’s sales totaled $1.1 billion, down 64% from $3.1 billion in the third quarter of 2008. The drop in sales and thereby earnings was driven by a decline in potash, phosphate and nitrogen sales volumes coupled with lower phosphate and nitrogen prices. The company blamed the global economic downturn for the drop in sales volumes and prices. However, it expects to see a strong rebound in potash sales volumes in 2010.

Sales in the Potash segment declined 63% year over year to $423.4 million on a 44% decrease in sales volumes to 1 million tons and a 34% drop in average selling prices to $389.2 per ton. For 2009, Potash Corp. expects sales volumes to be in the range of 3.0 to 3.2 million tons, down from the previous estimate of 4.5 to 5.0 million tons.

Phosphate sales volumes decreased 9% year over year to 882,000 tons in the quarter due to lower liquid fertilizer, feed and industrial volumes. Average realized phosphate prices in the quarter halved to $356.24 per ton compared to the year ago quarter. Phosphate net sales amounted to $319.2 million in the quarter, a decline of 69% from the prior-year quarter.

Nitrogen sales were down 64% to $3 billion in the quarter on a 63% decline in average selling prices to $203.73 per ton. Volumes remained almost flat at 1.4 million tons. Urea sales volumes increased 31% to 367,000 tons in the quarter.

The global economic crisis and weak demand are matters of concern for Potash Corporation. Potash Corp is expecting fourth quarter net income per share to be in the range of 65 cents to 85 cents. For the full year, the company anticipates earnings to be at the lower end of $3.25 to $3.75 per share, down from the previous estimate of $4.00 to $5.00. Full-year potash gross margin is expected to be in the range of $0.7 million to $0.9 million against the prior guidance of $1.2 million to $1.5 million.

Foreseeing lower demand, Potash Corp. -- which directly or indirectly accounts for more than 22% of the world's potash production capacity -- regulated the price of potash by adjusting output aims. It curtailed potash production in early 2009 by more than 2 million tons, which is slightly below the 2008 level.

Although the company has forecast a rebound in potash demand in 2010, it anticipates some of its production capacity to remain idled through the year. Potash Corp expects global potash demand of about 50 million tons in 2010.

We downgrade Potash Corp. from Neutral to Underperform.