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Bear of the Day: Potash (POT)

Tracey Ryniec

These are rough times for the fertilizer companies. Potash Corporation of Saskatchewan (POT), the world's largest crop nutrient company, recently missed on fourth quarter results. This Zacks Rank #5 (Strong Sell) also guided 2014 under the Zacks Consensus.

The Bad News Mounts

The terrible conditions in the fertilizer industry are no surprise. In July 2013, Russian-based Uralkali announced it was dropping out of the potash cartel and would operate its plants at nearly 100% capacity. The price of potash plunged.

On Dec 3, Potash announced that it was cutting 18% of its workforce due to the sluggish environment in the potash and phosphate businesses.

Another Sour Quarter

Investors got no relief in the latest earnings report either. On Jan 30, Potash reported fourth quarter results and missed on the Zacks Consensus by 2 cents.

The fertilizer market remained challenging. Gross margins fell as lower prices in all three nutrients offset improved costs and higher sales volumes.

'This past quarter was a difficult one,' said President and Chief Executive Officer Bill Doyle.

'Pricing headwinds - most notably in potash - weighed on our performance, although there were signs as the quarter came to a close that the uncertainty in global markets was beginning to abate,' he added.

Full Year Estimates Sink

Potash gave 2014 full year earnings guidance of $1.40 to $1.80 per share. That was well under the Zacks Consensus Estimate of $2.01.

Not surprisingly, analysts moved to cut their estimates to get in line with the company's outlook. 11 estimates have been cut in the last 7 days pushing the Zacks Consensus down to $1.64.

That is an earnings decline of 21.4% compared to 2013.

Bad News Already Priced In?

Surprisingly, shares didn't really sink on the earnings report. They had already been beaten down last year on all of the other news.

Shares aren't exactly cheap either, given all the chaos in the industry. Potash has a forward P/E of 19.2.

However, investors are rewarded for their patience with a dividend currently yielding a juicy 4.5%.

If you're interested in the fertilizer sector, you won't find any Zacks Rank #1 (Strong Buy) or #2 (Buy) stocks. There's just too many difficulties right now.

But if you're intent on investing in the sector, you may want to consider Agrium Inc. (AGU). It is a Zacks Rank #3 (Hold). It is more diverse than Potash in that it not only sells fertilizer but has an agribusiness division. It is supposed to grow earnings by 8% in 2014 but it hasn't reported fourth quarter 2013 results yet.

[In full disclosure, the author of this article owns shares in POT.]

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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