Why Andreas Halvorsen and Ray Dalio are buying this Fertilizer company

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Mar 18, 2015

Potash Corporation of Saskatchewan Inc. (POT, Financial) is a corporation organized under the laws of Canada. The company is the world’s largest fertilizer company by capacity producing the three primary crop nutrients: potash, nitrogen and phosphate.

Potash operations: The company is the largest producer of potash worldwide by capacity. In 2014, the company's potash operations represented 20% of global potash capacity. The company own and operate five potash operations in Saskatchewan and one in New Brunswick.

Nitrogen Operations: The company's nitrogen operations involve the production of nitrogen fertilizers and nitrogen feed and industrial products, including ammonia, urea, nitrogen solutions, ammonium nitrate and nitric acid. Its nitrogen operations represented 2% of global nitrogen capacity. The company have nitrogen facilities in Georgia, Louisiana, Ohio and Trinidad.

Phosphate Operations: The company's phosphate operations include the manufacture and sale of solid and liquid phosphate fertilizers, phosphate feed and industrial acid, which is used in food products and industrial processes. The company's phosphate operations represented 3% of global phosphate capacity. The company have phosphate mines and mineral processing plant complexes in Florida and North Carolina. The company also have four phosphate feed plants in the United States and produce phosphoric acid at Geismar, Louisiana facility.

The company is attracting quite a bit of investor attention off late. Last quarter, billionaire investor Ray Dalio (Trades, Portfolio) bought 601,600 shares of the company while Andreas Halvorsen (Trades, Portfolio) bought 3,147,470 shares. The company also saw some insider purchases in the second half of last year with its directors Donald Chynoweth and Gerald Wayne Grandey buying 3,000 and 5,000 shares, respectively. Sell side analysts also seems to be warming towards the company's prospects and in December UBS analyst have upgraded the company's stock to buy from neutral. In his report UBS analyst Brian MacArthur mentioned the following reason to upgrade Potash Corp:

"Potash Corp is positioned to benefit from a significant ramp-up of low cost production through 2017 as its new Rocanville and Picadilly operations enter production. In the near-term the planned closure of Mosaic’s (MOS) Carlsbad operations in January 2015 and the current flood at Uralkali’s Solikamsk-2 mine could remove up to 2.4-3.4Mts of combined capacity from the market and provides the opportunity for Potash Corp to gain more volumes. Furthermore, this could also lead to higher pricing.

The current expansion at Rocanville and ramp-up at Picadilly will increase Potash Corp’s production capacity by nearly 4Mts and should contribute to materially lower costs. In addition, as these mines ramp-up through 2017 capex will decline and free cash flow should increase."

Management commentary also seems upbeat. On its recent earnings call, Jochen Tilk, the company's president talked about strong market fundamentals, which the company witnessed in fourth quarter. The company's sales volume topped expectations, and its price realizations also reflected a continuation of recovery that unfolded throughout 2014. For FY2015 management has given an EPS guidance of $1.90 to $2.20, and the company expects better costs and margins. The company's board and management team have recently raised dividends, which shows their confidence in the business as well as intent to return capital to the company's shareholders. Given the company's potential to increase earnings, coupled with declining expansion spending, it is likely that we will hear more positive news regarding dividend increases/ share buybacks going forward.

Potash Corp is trading at a forward P/E of 14.93 and has a forward dividend yield of 4.70%. The company's EPS forecast for the current fiscal year is $2.08 and next year is $2.24. Out of 31 analysts covering the company, nine are positive and have buy recommendations, 19 have hold ratings, and three have sell ratings. The company's low valuation, high dividend yield and improving fundamentals seems to be key reason why hedge fund managers and insiders are getting bullish on the stock. I recommend buying the stock for the same reasons.