Could Potash Corp./Saskatchewan Inc.’s Q2 Earnings Support a Continued Rally?

Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) released second-quarter earnings on July 30, and its stock has reacted by rising over 3%. Could the rally continue?

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Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT), the world’s largest manufacturer of fertilizer, announced mixed second-quarter earnings results before the market opened on July 30, and its stock has responded by rising over 3%. Let’s take a closer look at the results to determine if this could be the start of a sustained rally higher and if we should consider initiating long-term positions right now.

Breaking down the second-quarter results

Here’s a summary of Potash’s second-quarter earnings results compared with its results in the same period a year ago. All figures are in U.S. dollars.

Metric Reported Expected Year-Ago
Earnings Per Share $0.50 $0.52 $0.56
Revenue $1.73 billion $1.67 billion $1.89 billion

 Source: Financial Times

Potash’s earnings per share decreased 10.7% and its revenue decreased 8.5% compared with the second quarter of fiscal 2014. The company’s double-digit percentage decline in earnings per share can be attributed to its net income decreasing 11.7% to $417 million, but this was slightly offset by its weighted average number of diluted shares outstanding decreasing 1.1% to 837.75 million. Its sharp decline in revenue can be attributed to sales decreasing 14.8% to $559 million in its nitrogen segment and 13.3% to $424 million in its phosphate segment.

Here’s a quick breakdown of 12 other notable statistics from the report compared with the year-ago period:

  1. Production of potash increased 2.8% to 2.39 million tonnes
  2. Sales volume of potash decreased 0.5% to 2.51 million tonnes
  3. Revenue from the sale of potash increased 0.1% to $748 million
  4. Average realized price of potash increased 3.8% to $273 per tonne
  5. Production of nitrogen decreased 9.3% to 753,000 tonnes
  6. Sales volume of nitrogen decreased 1.9% to 1.63 million tonnes
  7. Average realized price of nitrogen decreased 15% to $334 per tonne
  8. Production of phosphate decreased 17.4% to 379,000 tonnes
  9. Sales volume of phosphate decreased 20% to 679,000 tonnes
  10. Average realized price of phosphate increased 8.6% to $553 per tonne
  11. Adjusted earnings before interest, taxes, depreciation, and amortization decreased 8.8% to $792 million
  12. Cash provided by operating activities increased 6.1% to $836 million

Potash also narrowed its full-year outlook on fiscal 2015, and is now calling for earnings per share in the range of $1.75-1.95 compared with its previous outlook of $1.75-2.05.

Is the rally warranted and can it be sustained?

It was a fairly weak quarter for Potash, so I do not think the post-earnings pop in its stock is warranted. However, I do still think the stock represents an attractive long-term investment opportunity today because it trades at inexpensive forward valuations and because it has a high dividend yield with a track record of increasing its payment.

First, Potash’s stock trades at just 19.6 times its median earnings per share outlook of $1.85 for fiscal 2015 and only 16.8 times analysts’ estimated earnings per share of $2.15 for fiscal 2016, both of which are inexpensive compared with its five-year average price-to-earnings multiple of 19.7 and the latter of which is inexpensive compared with the industry average multiple of 18.9.

Second, Potash pays a quarterly dividend of $0.38 per share, or $1.52 per share annually, which gives its stock a 5.3% yield at today’s levels. It is also important to note that the company has increased its annual dividend payment for four consecutive years, and its 8.6% increase in January puts it on pace for 2015 to mark the fifth consecutive year with an increase.

With all of the information provided above in mind, I think Potash Corp./Saskatchewan represents one of the best investment opportunities in the market today. Foolish investors should take a closer look and strongly consider beginning to scale in to long-term positions.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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