Stock #2 -- Potash

Potash Corporation of Saskatchewan

Macro Picture:

There is a dietary shift taking place in India and China. Their combined populations of 2.4 billion people are eating better. They want to eat America’s lunch. This is putting a strain on global grain supplies. Farmers want to grow as much as possible – and this is sending demand for potash fertilizer soaring.

Potash CEO Bill Doyle commented in January that the growing world appetite for protein-rich diets amid dangerously tight global grain stocks would continue to push record crop prices higher, spurring fertilizer use.

"That switch (in diets) is so fundamental that it would take a global depression to upset the apple cart. And that's what a lot of people don't understand," Doyle told Reuters.

Then on Tuesday, Doyle told Bloomberg Television that people and livestock are consuming more grain than ever, draining world inventories and increasing the likelihood of shortages.

“If you had any major upset where you didn't have a crop in a major growing agricultural region this year, I believe you'd see famine,'' Doyle said.

Global grain stockpiles fell to about 53 days of supply last year, the lowest level since record-keeping began in 1960, according to the U.S. Department of Agriculture.

Three importers dominate global demand for potash, and none of them can produce its own supply. Chinese consumption is at 11.5 million tonnes per year growing at 12%; India’s demand is at 4.5 million tonnes, growing at 9%, and Brazil consumes 5.8 million tonnes with growth at 11%.

Globally, potash demand is growing at 3% to 5% per year. Even at 3% growth, you’d need 2 million more tonnes of potash, or the equivalent in volume to the start-up of a new mine, to feed that need. Now for the really good news: The province of Saskatchewan, where PotashCorp operates, possesses approximately 40% of the world's known reserves of potash. While potash is only 35% of PotashCorp’s business, that business should continue to boom for PotashCorp for a long time to come.

Company Fundamentals

Potash Corp is the world’s biggest producer of potash fertilizer – it produced 12.9 million tons of potash last year, more than 20% of the world's supply. Potash Corp focuses on North America, but reaches all over the Western hemisphere. Its PCS Nitrogen unit makes its nitrogen products. The company’s value has more than doubled in the past year, but it could go higher.

Rip-roaring revenue growth: Fourth-quarter sales for the Saskatoon, Saskatchewan-based company were $1.43 billion, up 40 percent from $1.022 billion for the same time last year.

Earnings look great: The company has more than doubled net income in the past two years to $1.1 billion and expects gross profits from potash to expand to $8 billion within five years from $912 million in 2007. Doyle has described his company’s earnings potential in 2008 as “sensational.”

It’s Cheap! Earnings are growing so fast that price-to-earnings growth is 0.53 – anything under 1 is considered cheap. PotashCorp trades at very low multiples compared to both the S&P 500 and its industry. It beat estimates, recently raised its earnings forecast, and I wouldn’t be surprised to see it do so again. And yet, Wall Street is shrugging off this stock’s potential. That disconnect won’t last long!

I expect this stock is going much higher. Potash is currently trades at $156. My target is $222. Buyers of my agriculture boom report will remember that this was one of my picks in that report.

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