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We are retaining our Neutral recommendation on the world's largest fertilizer company Potash Corporation of Saskatchewan Inc. (POT - Analyst Report). The Canada-based company posted better-than-expected results in third-quarter 2012 but reduced its earnings forecast for 2012.

Earnings of 74 cents a share for the third quarter beat the Zacks Consensus Estimate by a penny. Revenues dipped nearly 8% year over year to $2,143 million, hurt by lower offshore potash sales due to the delay of new supply contracts with China and India. However, it managed to surpass the Zacks Consensus Estimate.

The company truncated its earnings target for 2012 as it expects potash volume to decline in the fourth quarter. While potash demand has somewhat weakened lately, the company expects a strong rebound in 2013 driven by a recovery in the emerging markets.

Potash Corp. has a competitive advantage stemming from its mining rights to the world's largest potash reserve. The company has a strong geographic diversification and continues to invest in expanding its operational capability in potash.

While there is uncertainty surrounding the U.S. economy and the sovereign debt crisis in Europe, the strain on the world's food supply is driving demand for all three nutrients of the company, especially potash. Given the tight potash supply in North America and Latin America, the demand for potash is expected to rise as buyers are now seeking to secure the product.

With more than half of the world's estimated new supply coming from its projects between now and 2015, the company believes that it can capture a significant share of demand growth over the next several years. Potash Corp., like other major fertilizer companies, is also expected to gain from high crop prices (especially for corn) and tight inventories resulting from the U.S. Midwest drought.

However, the company is exposed to macroeconomic uncertainties and other issues such as price volatility and currency exchange fluctuation. While the need for potash is significant in major developing economies like China and India in the long run, a few short-term challenges across these markets may impact the near-term demand for fertilizers.

The Indian government's move to trim potash subsidy levels coupled with higher retail pricing resulted in lower demand in that country. The company has cut its potash shipment forecast for 2012. The delay associated with the supply contracts with China and India is expected to impact near-term potash demand.

Potash Corp, which competes with BASF (BASFY) and Mosaic Co. (MOS - Analyst Report), currently retains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.

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