Saturday 4 July 2015

Analysis of PotashCorp

PotashCorp, a Canadian mining company

Company: PotashCorp

ISIN CA73755L1076 | WKN 878149 

Business: A Canadian mining and fertilizer company. They are improving the crop yields by providing farmers with potash (K), nitrogen (N) and phosphate (P) that they are mining mainly in Canada but they are also active in six more countries.

Active: World wide with sales.

P/E: 17.04

Comment: Due to the latest interaction with one of my holdings, K+S (analysis of K+S 2015), I felt that it was a good moment to take a closer look at them.

contrarian values of P/E, P/B, ROE as well as dividend for PotashCorp

The P/E is high with 17.0 and the P/B is also a bit too high with 3.0 which gives a clear no go from Graham. The earnings to sales are excellent with 22% and the ROE is also pretty great with 17.5%. the book to debt ratio is also good with 1.0.
In the last five years they have had a yearly growth rate of 1.7% which is so, so and this then gives us a motivated P/E of 9 to 12 which means that PotashCorp is today overvalued on the market.
They pay a very nice dividend of 4.5% however that represents 77% of their earnings which I find to be crazy high and gives a clear indication of their vision for the future.

Conclusion: Graham says no and so do I to PotashCorp. The P/E is too high, the P/B is too high and the ratio of their dividend payment to earnings is far too high. The ROE and the dividend payment are however attractive but in total it is not enough.

As a shareholder in K+S what I see here is that PotashCorp is a company without any vision for the future that are now trying to buy a vision cheap by taking over K+S. The offered 41 € is far too low just like the K+S management also claimed and PotashCorp needs come up with a more proper offer for getting me even interested in selling my shares. Only the Legacy project, according to K+S management, is worth 21 € per share and it is next door to PotashCorp so I get that they want that... but so do I and at the moment I have it in my pocket.

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Falk said...

Hi Fredrik,

how did you calculate the intrinsic value of K+S? From my point of the view the offer of PotashCorp is very fair. My current intrinsic value calculation leads to about 30 € per share. PotashCorp is paying a premium because management expects synergies (as always). And K+S management is telling them, that the company is much more worth (also as always).

I put some numbers in a sheet, to show why I think that its a premium offer by PotashCorp. It would be nice to have your opinion on this:

Fredrik von Oberhausen said...

Oh, Falk! Good question for putting me in a tough spot!

I took a look at your calculation and thanks for sharing the link! Why do you consider K+S to have 1% earnings growth rate in the DCF? In the P/E you showed that they have had earnings growth rate of 3.4% per year. I used that in your sheet and then I got out an intrinsic value of 39 €. The management of K+S said that Legacy was worth 21 € and that 11€ was already in the books then accounting for that I would get the value to 49 € as being a fair price today. Based on your DCF analysis + Legacy.

My way of looking at things which is low tech in comparison to yours is that I want to sell K+S at a minimum of P/E 16. Right now with a share price of 38 € they have a P/E5 of 15 meaning that a fair price, for me, would be 41 € looking only at the past and without accounting for the future which includes Legacy. Accounting for Legacy and trusting the managements figure then a fair price would be 51 €. On top of that... I do not want to sell my companies at a fair price. I want to sell them when they are slightly overvalued and 41 € is to me still only a fair valuation.

Behavioural psychology is however telling that once you own something you very easily start to value that higher in comparison to what outside people do and this is part of the danger.

Falk said...

I put in 1% percent because from my point of view K+S is selling "only" commodities and its difficult to raise prices right now and the foreseeable future. The demand is only growing slowly and the competition is quite hard. The fixed costs of K+S are rather high, so its also difficult to get more market share without crushing margins.

They put a lot of money in their legacy project and I am not sure, that it will fulfill expectations (just thinking about the burned money of ThyssenKrupp in brasil). Perhaps these assumptions are a little bit to conservative, but to quote buffett's rule number one: don't lose money :)

Fredrik von Oberhausen said...

To me that is belt and braces Falk especially since you then also added 10% margin of safety to your calculation if I remember correctly.

I must admit that I do not know the story behind Thyssenkrupp in Brasil but I fear that I will have my own story due to being a shareholder in E.On...

Anyway... consider this... K+S have always been a commodity producer and they have had 3.4% earnings increase in the last couple of years so why should that drop down to 1% now? The competitors are still the same. The "worst" is over with Uralkali going nuts and from now on I would instead assume prices and earnings to increase again. Please also keep in mind that K+S have made a savings program of around 500 million that will kick in completely sometime around next year but already this year the effect will be seen so that will also kick up earnings and then in 2017 the money will start to come from Legacy.

Nah... over 50€ and I will be prepared to sell but until then no chance.