Stifel analysts Paul A. Massoud and Anthony Shen recognize headwinds for Potash Corp./Saskatchewan (NYSE:POT), but see early 2014 as a bottoming-out period and expect better things as the year goes on.
Potash Corp

Potash Corp./Saskatchewan (USA) (POT) Headwinds, But Floor Price reported adjusted 4Q13 EPS

Yesterday, Potash Corp./Saskatchewan (NYSE:POT) reported adjusted 4Q13 EPS of $0.31, below our estimate of $0.36 and the Street consensus of $0.32. Headline EPS of $0.26 included a $60 million charge related to severance costs from workforce reductions announced in December.

Potash Corp./Saskatchewan (NYSE:POT) guided to 2014 potash sales of 8.2-8.6 million tonnes, but said it had operational capacity of 9.0 million tonnes (we believe nameplate capacity is near 12.4 million tonnes as of year end 2013). As a result, we have lowered our full-year sales estimate from 8.9 million tonnes to 8.6 million tonnes.

We think the key to higher sales volumes lies in how strongly the spot market responds to the China contract signed last week. We note that last year’s contract resulted in increased spot demand once a floor in pricing was set by Chinese buyers, and we expect a similar outcome this year. We see increased spot demand leading to tighter markets and subsequently higher prices. As a result, we estimate PotashCorp’s realized blended potash price to rise from $274/tonne in 1Q14 to $291/tonne in 4Q14.

We are lowering our 1Q14 EPS estimate from $0.43 to $0.33 (Street consensus of $0.39) reflecting lower potash segment assumptions, but believe that 1Q14 results will be the low point this year. For 2014, we are lowering our EPS estimate from $2.00 to $1.80 (vs. the Street consensus of $1.86) incorporating our lower 1Q14 estimates as well as mine transition costs related to Picadilly and Rocanville and the accelerated depreciation tied to New Brunswick.

Potash Corp./Saskatchewan (USA) (POT) Headwinds, But Floor Price shares

We maintain our Buy rating on POT shares, but lower our target price from $38 to $37. We recognize near-term headwinds exist in the form of lower near-term realized prices. But, we think investors should focus on the effects of a price floor (as set by Chinese buyers), which we believe will lead to tighter global markets. Although excess capacity does exist in the system, we maintain that most of it is controlled by Canpotex members like Potash Corp./Saskatchewan (NYSE:POT) that are still intent on protecting price over volumes.