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Potash Corp./Saskatchewan (TSX:POT)(NYSE:POT), the world’s largest manufacturer of fertilizer and the company responsible for one-fifth of the global capacity of potash, has underperformed the overall market in 2015, falling over 2% as the TSX Composite Index has risen over 2.5%, but I think it will be one of the top performing stocks from this point forward. Let’s take a look at three of the primary reasons why I think this could happen and why you should strongly consider initiating a position today.
1. Double-digit earnings-per-share growth to support a higher stock price
On the morning of April 30 Potash reported first-quarter earnings results, and its stock has responded by rising about 1% in the trading sessions since. Here’s a breakdown of 12 of the most notable statistics from the report compared with the year-ago period (all figures are in U.S. dollars):
- Net income increased 8.8% to $370 million
- Diluted earnings per share increased 10% to $0.44
- Revenue decreased 0.9% to $1.67 billion
- Revenue decreased 17% to $482 million in its Nitrogen segment
- Revenue increased 10% to $738 million in its Potash segment
- Revenue increased 4% to $445 million in its Phosphate segment
- Production of potash increased 9.1% to 2.61 million tonnes
- Gross profit increased 18.1% to $667 million
- Gross margin expanded 650 basis points to 40.1%
- Operating income increased 5.3% to $559 million
- Operating margin expanded 200 basis points to 33.6%
- Ended the quarter with $217 million in cash and cash equivalents, an increase of 0.9% from the beginning of the quarter
2. The stock trades at inexpensive forward valuations
At current levels Potash’s stock trades at just 22.3 times its median earnings-per-share outlook of $1.80 for fiscal 2015 and only 18.6 times analysts’ estimated earnings per share of $2.16 for fiscal 2016, both of which are inexpensive compared with its long-term growth potential.
I think Potash’s stock could consistently command a fair multiple of at least 25, which would place its shares around $45 by the conclusion of fiscal 2015 and around $54 by the conclusion of fiscal 2016, representing upside of more than 11% and 34%, respectively, from today’s levels.
3. A high dividend that has been increased consistently
Potash pays a quarterly dividend of $0.38 per share, or $1.52 per share annually, giving its stock a 3.8% yield at today’s levels. The company has also increased its dividend six times in the last four years, making it one of the top dividend-growth plays in the industry today, and its consistent free cash flow generation could allow for another increase in the near future.
Should you buy shares of Potash today?
I think Potash Corp./Saskatchewan represents one of the best long-term opportunities in the market today. It has the support of double-digit first-quarter earnings-per-share growth, its stock trades at inexpensive forward valuations, and it has a 3.8% dividend yield with a track record of increasing its payout. With all of this information in mind, I think long-term investors should strongly consider beginning to scale in to long-term positions in Potash today.
