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Potash Corp. to Gain from Higher Demand Amid Pricing Woes

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On Mar 20, we issued an updated research report on fertilizer maker, Potash Corp. .

Potash Corp.’s profits tumbled roughly 71% year over year in fourth-quarter 2016, hurt by lower year over year pricing across all businesses. Earnings and sales for the quarter also missed the respective Zacks Consensus Estimate.

Potash Corp. expects full-year 2017 earnings to be in the range of 35 cents to 55 cents per share. The company expects total potash sales volume to be in the range of 8.7–9.4 million tons in 2017.

Potash Corp. is reeling under the effects of the depressed prices of crop nutrients. Prices for potash continue to be hurt by elevated supply. Depressed global energy prices and higher supply have also contributed to a softer nitrogen-pricing environment. Weak potash and nitrogen prices are expected to affect margins in these businesses in first-quarter 2017.

The broader fertilizer industry remains hamstrung by a slew of headwinds including low prices of nutrients and depressed farm income. The prevailing softness in agricultural commodity pricing remains a concern for companies as it is hindering fertilizer use by farmers, given the adverse effect of lower crop pricing on growers’ income. A weak crop pricing environment has created uncertainty about potash consumption.

Potash Corp. has also underperformed the Zacks categorized Fertilizers industry over a year, partly due to the pricing headwinds faced by the company. The company’s shares have lost around 5.1% over this period, compared with roughly 3.5% gain recorded by the industry.

However, Potash Corp. is expected to benefit from improving demand for potash. While market fundamentals have been challenging in 2016, the company sees an improved environment in 2017 with higher expected demand for potash across key consumer markets.

Potash Corp. saw healthy demand for potash in the fourth quarter and expects consistent customer engagement through 2017, supported by healthy consumption trends. The company’s expanded operational capability also provides it with an advantage to increase its share of the demand growth in the future.

Potash Corp. and Agrium , in Sep 2016, agreed to merge their businesses to create a fertilizer powerhouse with a pro forma enterprise value of $36 billion. The proposed merger would create the world’s largest crop nutrient supplier and the integrated company will be better placed to counter the headwinds in the crop nutrient markets. The transaction is expected to conclude in mid-2017, subject to customary closing conditions.

The combined company will also be better positioned to serve customers and growers with low-cost, high-value products and services and complementary assets. The integrated company is expected to generate as much as $500 million of annual operating synergies. Roughly $250 million of these synergies are expected to be achieved by the end of the first year following the completion of the transaction.

Potash Corp. is a Zacks Rank #3 (Hold).

Stocks to Consider

Better-placed companies in the fertilizer space include Intrepid Potash, Inc. (IPI - Free Report) and The Mosaic Company (MOS - Free Report) , both holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Intrepid Potash has an expected earnings growth rate of 60.2% for the current year.

Mosaic has an expected long-term growth rate of 9.5%.

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