PotashCorp (POT.TO)

You can write puts on this during weakness. You might have a dividend cut in this name to come. Over time you could make money with this one, however.

(Market Call Minute) Long term it will be okay; be patient.

$20-$20.50 a decent entry point? Is the dividend sustainable? They warned for the year after today’s close, so the stock is going down in the morning for sure. You might get your $20.50. Unless there is a further deterioration in potash prices, the dividend is probably okay, but not certain. They could decide to cut it to preserve cash. If so, he thinks the stock would go to $18-$19. Feels there is still another poor year coming and a bunch of risks, so not something he would own.

Good long term hold? 10 years+? He would tend to think so, based on macro agricultural demand and population growth. They report tomorrow which should give you a little more information. Payout ratio is at about 140% of free cash flows, which is a big issue. Also, China is a big price setter when it comes to potash and nitrogen. China was giving smaller nitrogen players big discounts on electricity, and that is about to disappear, which will put a bit of a cramp on the supply coming out of China. Prefers Agrium (AGU-T) right now.

He loves the feed-the-world trade. That is not mattering that much right now. It looks like we are making a bottom, but we have not confirmed. He is starting to like it here.

You have to think about what demand will be. You want rich customers. Unfortunately it is not a good outlook for farmers’ incomes. Corn prices are down. Oil rigs are on the land, but oil prices are down. The outlook for fertilizer demand is down, but the stock is relatively cheap. So it is a case of how patient you want to be. This stock could be a source of funds to move into metals.

He is not concerned about the valuation, but about the dividend. He does not think they cut it enough when they did so. He prefers AGU-T.

There are a lot of factors that are outside their control. When he looks at this, he wonders how healthy the market truly is, and what this company might have to do to help it improve. You have to buy this at the right time as it is a cyclical business. He is watching this. Would prefer CF Industries (CF-N).

Demand will be strong for the next 30 years, but there is lots of supply for potash. You need to look at when the world was very bullish on potash. We are now at the bottom of the consolidation that happened in ’08. It is probably at the bottom of a range. He is liking it here so hold on to the stock.

He would take a shot at it here. Model price is $30.85, a 44% upside. If it really broke down to $19.50 he would sell the position. It is at EBV +2 and seems to be holding. Model price of AGU-T is $116.95, which is where it is trading.

Fertilizer stocks, particularly this one, have periods of seasonal strength from October through to January. From January to June, the stock has a history of underperforming and moving to the downside. Technically, it has just broken down to new lows. The best thing is to avoid this stock until there are signs that the stock has bottomed, probably later this summer.

Potash prices are rolling down again. In North America they are breaking down towards the $200 per ton level. Brazil is still pretty soft. China is pushing down pretty hard. The dividend payout is at about 130% of earnings, so he doesn’t think it is sustainable at the current range. They are going to have to revise their earnings estimates downwards for the year. Getting closer to a buying point, but you are getting in front of a train in the short term. Dividend yield of 6.1%, and thinks they have to cut it again.

It is in an interesting place. The commodity price fell and they cut production. Now prices are stabilizing. Some people are saying they did not cut their dividend enough. These are long life mines. They are still making money at these prices.

He knows Agrium (AGU-T) much better. You want to be looking at fallen angels that will be there 10 years from now. When they are really washed out like this, you should be looking at writing Puts, and try to get it at $20. Dividend yield of 5.88%.

Potash is cyclical. To bet against cyclical stocks is a very hard to do. Just when you think the worst is in, that is probably when they are most attractive. Has never been able to time this one properly. Likes companies that have pricing power and the ability to raise prices every year, and are not beholden to the input prices.