Why investors should follow Potash Corp.'s earnings call

Part 5
Why investors should follow Potash Corp.'s earnings call (Part 5 of 5)

Fertilizer shares recover after Potash Corp.’s earnings decline

The importance of earnings

Expected and actual earnings are two main factors that drive share prices. As a general rule, when actual earnings beat expectations, share prices tend to rise. Conversely, when earnings come in worse than analysts’ estimates, share price can be negatively affected. Since investors are forward-looking, it’s also important for analysts to read what managers expect for the future. If managers give a weak outlook, share prices could be negatively affected.

Industry and Sector PerformanceEnlarge Graph

Market expectations

But a third part of earnings analysis involves market expectation. Because what the market sees and what analysts estimate can sometimes diverge, reading market movements is another important factor. After Potash Corp.’s (POT) earnings were released on October 24, share prices of the company—as well as several other peers like Intrepid Potash Inc. (IPI), Agrium Inc. (AGU), Mosaic Co. (MOS), and CF Industries Holdings Inc. (CF)—fell sharply in the opening session.

Shares recovered more than half of the decline by the end of the day. So although the market might have negatively taken Potash Corp. (POT)’s earnings at first, it seems like it was only a temporary sell-off and nothing major.

Current share prices are near 2009 lows

Of course, if investors trace back current share prices of potash and phosphate producers like MOS, IPI, and POT, we’re now near 2009 lows. Current potash and phosphate price are still above their levels in 2009, when the world seemed about to end. This means the market has pretty much priced in potash prices at around $300 per metric tonne. Unless we do see potash and phosphate prices fall significantly below where they were in 2009, prices for these fertilizer companies aren’t going to fall much.

Most fertilizer companies haven’t fallen over the past three months after the breakup of Uralkali and Belaruskali, and have moved sideways or slightly higher instead. This is likely because the market doesn’t expect the breakup of Belaruskali and Uralkali will drive potash prices substantially lower from current prices of ~$300 per metric tonne. With a dividend yield of above 4.5% for Potash Corp. (POT), many may consider it a value play. Investors looking to diversify investments across the agriculture business—which does include fertilizers—can always use the Market Vectors Agribusiness ETF (MOO).

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