Why PotashCorp Is among the Top 10 Agricultural Chemicals Stocks
PotashCorp (POT) is one of the largest producers of potassium fertilizers. The company also produces nitrogen and phosphate fertilizers. Commodity companies such as PotashCorp are highly sensitive to the movements in fertilizer prices.
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Over the past ten years, PotashCorp has fallen 22.7% and significantly underperformed the S&P 500 Index’s rise of 69.2% over the same period. The above chart shows how the company’s stock moved lower with a deterioration in earnings growth over the recent ten-year period.
If we consider the recent five-year period, the stock has significantly underperformed the S&P 500 Index, falling of 47.3% compared to the S&P 500’s rise of 70.3%.
It was negative for the overall market in 2008 on the back of the financial meltdown in the United States. Since then, companies such as PotashCorp, Mosaic (MOS), and CF Industries (CF) are still not delivering decent performances.
Why this performance?
PotashCorp’s earnings growth and the improvement in its stock are driven by the movements in fertilizer prices. The prices for all three NPK (nitrogen, phosphorous, and potassium) fertilizers have fallen over the years since producers have excess capacity. It’s important for investors to track fertilizer prices. You can do this at Market Realist each week. Read our latest fertilizer price update series, Fertilizer Prices Were Broadly Positive: Week Ending September 1.
In 2017, the prices for potassium fertilizers have improved, which may have driven the stocks for PotashCorp and Intrepid Potash (IPI) higher YTD (year-to-date). So far in 2017, PotashCorp has risen 2.5%, and Intrepid Potash has risen 78.4%. Bear in mind that Intrepid Potash’s impressive return this year wasn’t completely driven by the rise in potash prices.
The road ahead
Deteriorating fertilizer prices have pressured the margins of fertilizer players (MOO). Fertilizer producers have resorted to the best available option to protect their margins, which is cost optimization. Companies are doing this by either moving to lower cost production facilities or consolidating with other players to achieve cost synergies.
PotashCorp is set to merge with Agrium (AGU), which we’ll look at in the next part.