Pondering POT (Potash Corp)
August 28, 2008
Potash Corp of Saskatchewan (POT) experienced an 82% EPS growth rate over the last 5 years and 87% last year. What’s more, the S&P Stock Report expects the company to report record earnings in 2009 for the sixth consecutive year. Value Line says it is the world’s largest integrated fertilizer company with potash accounting for 49% of 2007 profits, nitrogen 28%, and phosphate 23%.
HenriR’s club bought POT in 2005 at $27.00 and it’s risen to about $170 per share, a terrific gain. It now comprises almost 19% of their 20 stock portfolio and she has proposed that the club sell some or all of the stock.
Here’s a comparison of Henri R’s SSG with Take Stock and with two SSGs of mine (both with the same judgments, but one with Hemscott data from Stock Central and the other with S&P data from Better Investing). As you will see, the different data sources make a big, big difference.
| Potash Corp (POT) | HenriR | Take Stock | Armin-1 | Armin-2 |
| Data | Hemscott | Hemscott | Hemscott | S&P |
| Date | 8-15-08 | 8-25-08 | 8-25-08 | same |
| Price | $169.81 | $180.29 | $177.54 | same |
| 52 High & Low Price | $241.62 & $76.41 | n/a | $241.62 & $82.76 | same |
| Sales Growth | 10.00% | 9.40% | 10.00% | same |
| EPS Growth | 15.00% | 9.40 initial -1.13% final | 15.00% | same |
| Project Growth from | Last Annual | Unknown | Last Quarter | same |
| High PE | 33.7 (ave hist High PE) | 22.7 | 25.7 (2003 & 2007 out) | 28.9 (same) |
| High Price | $230.50 | $72.84 | $234.10 | $369.10 |
|
Value Line Estimated High Price = $355-535 as of 7-18-08 |
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| Low PE | 18.4 (ave hist Low PE) | 12.1 | 13.9 (2003 & 2007 out) | 15.3 (same) |
| Low Price | $73.20 (“other” option) | $42.11 | $47.30 (Low PE x Low EPS) | $97.20(same) |
| Upside/Down | 0.6 | Impossible to Calculate | 0.4 | 2.4 |
| Total Return | 7.0% | -16.4% | 6.6% | 16.3% |
| Buy Under | $112.53 | $36.74 | $94.00 | $165.18 |
| PTPM – 5 yr ave | 17.5% trend up | 17.5% trend n/a | 17.5% trend up | 17.9% trend up |
| ROE – 5 yr ave End Equity | 16.2% trend up | n/a | 16.2% trend up | 15.1% trend up |
| ROE – 5 yr ave Start Equity | 21.7% trend up | 21.7% trend n/a | 21.7% trend up | 20.3% trend up |
| Debt: Equity - 5 yr ave | -0- trend even | n/a | 48.6% trend down | 49.4% trend down |
| RV/PRV (with two outs) | 143.7/124.9 | n/a | 198.0/172.1 | 126.7/110.0 |
| RV/PRV (with no outs) | 143.7/124.9 | n/a | 150.2/130.6 | 96.6/83.8 |
| Quality | Not Rated | 3.2 (Unacceptable) | Not Rated | B |
Discussion:
- Henri’s SSG indicates a HOLD with an Upside/Downside Ratio of .6 and a measly Total Return of 7.0%. Even though her SSG does not signal SELL, better portfolio balance remains a good reason to sell some of the stock, especially if there is a replacement candidate that’s a better alternative.
- Henri chose to project future growth from the Last Year of annual data. Had she projected from the Last Quarter of data, a relatively small change, her Forecast High Price would have increased by a whopping 33%, from $230.50 to $307.00.
- She also chose to use the open-ended “other” option for her Forecast Low Price ($73.20) which is unusual in that it is higher than any of the other four standard Low Price options. It would be good practice to explain atypical decisions in the Toolkit’s “Notes” section which then could be exported in the ITK format.
- The two different data sources result in much different SSGs:
** When I used the same judgments for Armin-1 and Armin-2, I got a 6.6% Total Return with Hemscott data and 16.3% with S&P data; for the Upside/Downside Ratio, I got 0.4 with Hemscott and 2.4 with S&P.
** I eliminated 2003 & 2007 from my Forecast High and Low PEs and got 25.7 High with Hemscott data and 28.9 High with S&P. As a result, I got a $234.10 Forecast High Price with Hemscott and $369.10 with S&P, a significant difference.
** I don’t follow POT and I leave to those of you who do to offer an explanation as to what’s going on with the different data (VL data is also different). Because I did SSGs with Hemscott and S&P data, I realize that here is a situation where the choice of data makes an enormous difference. [ADD: Jim Thomas explained, in a comment, that much of the differemce in SSGs is due to the S&P data file containing one later quarter than the Hemscott data file.]
- When I did my SSGs, analyst estimates for long-term EPS were mixed and unreliable: FactSet CallStreet = 40.00% (1 analyst); First Call-Yahoo = 10.00%; Reuters via Morningstar = 40.00%; VL = 46.00% (40% Earnings Predictability); S&P = n/a; Zacks = 20.12% sales & EPS n/a.
- Take Stock estimated EPS at -1.13% for the next 5 years while I used 15.00% EPS, the same as Henri.
- All three SSGs with Hemscott data got a Forecast High Price well below the low end of VL’s estimated High Price of $355-535. Take Stock’s High Price of $72.84 in the next 5 years was an incredible $283 per share or 205% the BELOW the low end of VL’s estimate as well as 77% BELOW POT’s current price.
- Pre Tax Profit Margin is in the 40% range for the first two Qs of 2008, but averaged 29% throughout all of 2007 with either Hemscott or S&P data. Maybe 40% is atypical and, for sure, I would not use it in the Preferred Procedure which estimates EPS for the next 5 years.
- POT’s 3.2 Quality Rating from Take Stock is unacceptable and below the 3.4 minimum required to pass muster; 6.7 is desired and 10.0 is max. POT got a B for Quality from S&P where A+ is highest out of 8 ratings. Hemscott makes no Quality rating.
- Take Stock’s SSG is nuts: -1.13% estimated EPS; Forecast High Price of $72.84, some 77% BELOW POT’s current price; -16.4% Total Return; and an Upside-Downside Ratio that is impossible to calculate.
