Analysis of K+S 2014

Company: K+S

Business: A German potash, magnesium and salt miner. The group is divided into the two segments Potash & Magnesium (that is being used as standard and speciality fertilizers for enhancing the agricultural harvests) and Salt (de-icing, purified salt that are used for instance as table salt etc.).

Active: Main focus in Europe and the US. Growing activity in Canada due to Legacy mine that is under construction. Minor presence in South America and Asia.

P/E: 10.2

The previous analysis of K+S can be found here.

The P/E of K+S is fully acceptable with 10.2 and the P/B is ok but not more with 1.2 which gives us a clear buy signal from Graham. The earnings to sales are at 10% which is fully ok but less then in 2012 and the same goes for the ROE that is now only at 12.2% which is not as high as one would like to see especially when they retain the earnings by cutting the dividend. The book to debt is at a ratio of 0.8 which is ok. In the last six years they have had a yearly negative revenue growth of -3.2% which is bad and this gives us a motivated P/E of 8 to 10 which means that they are today fairly valued by the market. They spend far too little on R&D with only 3.4% of the earnings and I still hope they will realise the importance of that one day. They have decided to pay a silly dividend of 1.1% which on the other hand only represents 11.6% of their earnings so plenty of space upwards next year.

Conclusion: Graham says yes to K+S and I say today no to it. They must really show that they have managed to change the direction of the ship before it is worth to step in there as a new shareholder. Sure the P/E and P/B looks good and the ROE is also ok but it just is not good enough. There are better companies out there to make fresh investments in so I will stay as a shareholder but I will not recommend anyone to step in unless changes are first seen in for instance their margins and earnings.

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