Eric E. Ormsby, Alcosta Growth Report
Erick E. Ormsby is the President and Chief Investment Officer of Alcosta Capital Management, Inc. He brings a life-long passion for investing and extensive investment experience to Alcosta’s client list. Before founding Alcosta Capital Management, Mr. Ormsby was a financial consultant at Merrill Lynch,
and earlier was a securities analyst and member of the portfolio management team at Insight Capital
Research and Management.
Potash Corporation (NYSE:POT)
Potash Corporation (Potash Corp.) is the world’s largest fertilizer company in terms of capacity. It provides three primary plant and animal nutrients: potash, nitrogen, and phosphate. Each nutrient makes up about a third of its sales, but potash is its most profitable, generating over half of the company’s total profits.
Potash comes from potassium that is left behind after sea water evaporates; it is mined from underground deposits. Over 90% of the company’s potash is sold for crop fertilization. The company’s nitrogen is generally used in feed for livestock and a small percentage has industrial applications. The firm’s phosphate is used to increase the growth and reproduction of plants and also helps in the growth of animals.
When it comes to producing potash, there are a limited number of players, and Potash Corp. has a very strong leadership position. They have nearly one-quarter of the world’s current production capability, and they also hold three-quarters of its unused capacity. So while other competitors’ growth is constrained by the limits of their production capacity, Potash Corp. still has plenty of room to grow.
The long-term demand for the potash nutrient is expected to grow at a rate of 3 to 4% annually, which will require up to 2 million tons of additional production every year. The potash industry will be challenged to keep pace with demand due to capacity constraints, making Potash Corp.’s excess capacity increasingly valuable. The supply situation is not likely to change any time soon because there are high barriers to entry into the potash market. It costs about $1.6 billion to set up a 2 million-ton project. The cost to build a mine keeps potential competitors out of the market. As evidence of this, a new potash mine has not been built since 1985 which is an added benefit to the existing producers.
The demand for fertilizers keeps growing. Driving this growth is a rising global population that is using its increased income to improve its standard of living. One significant aspect of the standard of living being upgraded is the diet. As incomes increase around the globe, people are incorporating more meat into their diets. More meat means more grain and other feed supplements which will be required to support commercial animal stocks. At the same time, the amount of available farmland has been shrinking for decades; farmers are currently planting on half the farmland that existed in the 1950s which means more fertilizer is needed to increase yields and the quality of the crops for food, animal feed, and fiber. In addition, farmers are trying to increase corn production to meet growing demand for ethanol. Without fertilizer to help grow the corn crops, farmers will have a difficult time meeting that demand. Rising demand for ethanol has led to a 15% rise in planned US corn plantings.
The company’s leadership position helps it generate strong profit margins. Both gross and operating margins have recently expanded to 37.4% and 31.6% respectively for its fourth quarter of 2007. Also, the company’s return on assets (ROA) of 12.7% for fiscal 2007 beat the industry average of 5.4% which indicates an efficiently managed firm. The P/E multiple on fiscal 2009 earnings estimates of $6.90 is currently 20 with estimated growth that year of 18%. This gives the stock a reasonable price to earnings growth (PEG) ratio of 1.11. In addition, the company recently announced they are buying back up to 15.8 million shares of their own stock over the next year, or about 5% of its outstanding common stock.