Saskatoon, Saskatchewan based PotashCorp (POT) is the world’s largest fertilizer company by capacity. It produces potash, nitrogen and phosphate--the primary crop nutrients required to maintain healthy and productive soils. They have operations in seven countries and their products are sold throughout the world, including North American, Asian and Latin American markets.
Weak Q2 Results; Dividend and Guidance Slashed
The company reported net income of $121 million for Q2 2016, down about 71% from $417 million reported for the quarter a year ago. Adjusted earnings were $0.18 per share,in-line with the Zacks Consensus Estimate.
Revenues for the quarter plunged 42% year over year to $935 million and missed the Zacks Consensus Estimate of $1,137 million.
The company lowered its guidance for the year and also cut its dividend—for the second time this year.
Analysts have cut their estimates for the company after disappointing results and guidance. Zacks Consensus Estimates for the current and next year have fallen to $0.58 per share and $0.75 per share, down from $0.70 and $0.86 before the results.
They missed in three out of last four quarters (met in one), with an average negative quarterly surprise of 7%. With an Earnings ESP of negative 25% currently, the company may miss again.
The following chart shows negative earnings and price momentum for the company:
Industry Outlook—Short Term Outlook Remains Weak
Global population and the need for food are rising rapidly. Further, the demand for better quality food is surging with rising middle class in many developing countries. As most of the population growth is in countries where there is little room for expansion of arable lands, the need for fertilizers and other resources used for increasing crop yield will also continue to increase.
Thus looking at the longer-term, there is a case for investing in agriculture and fertilizer stocks.
But the near-term outlook remains cloudy due to oversupply, weak demand and falling prices.
Per Zacks Industry Outlook, “the fertilizer industry is in a rut and still hamstrung by a slew of headwinds that continue to weigh on the performance of the companies in the space. Fertilizer makers remain exposed to a difficult pricing environment for the nutrients they sale. Potash prices, which are already at their lowest levels since 2007, remain under pressure due to elevated supply. Moreover, depressed global energy prices and higher supply have also contributed to a softer nitrogen pricing environment.
The Bottom Line
In addition to Zacks Rank #5 (Strong Sell), the company has Style Scores of “D” for Value and Growth and “C” for Momentum, resulting in a VGM Score of “F”. Further, the Zacks Industry Rank of 253 out of 265 (bottom 5%) indicates significant chances of underperformance in the short to medium term.
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