Stock Valuation – PotashCorp (POT)

The first stock valuation that I have completed with my new DCF Stock Valuation Model is on PotashCorp (POT), which trades on the Toronto Stock Exchange (TSE).

PotashCorp is the world’s largest fertilizer company by capacity, producing the three primary crop nutrients – potash (K), phosphate (P) and nitrogen (N).

Positives

• Global reserves of potash are highly concentrated to a few countries. Canada alone accounts for 46% of potash reserves. Russia accounts for 35%.
• PotashCorp is the largest producer of potash controlling 20% of world capacity
• There are significant barriers to entry in the potash production industry. It takes approximately 7-8 to develop a new potash mine. This means that periods of short supply could persist for some time until new capacity is added, resulting in higher prices.
• PotashCorp is the lowest cost supplier to the US market
• As the world population grows so will the demand for food and in turn fertilizers like potash. Changes in diets and decreases in arable land will also contribute to increased demand for potash and other fertilizers.

Negatives

• KCI (Potash) prices has risen ~150% since 2007 and now sit at $500 per MT. Is this sustainable? According to PotashCorp there are several factors that will justify the current price and potentially push it higher in the long term. I do however see this as a potential risk because if KCI prices actually go down in the future it will hurt PotashCorp’s revenues and margins.

Valuation

• Assumed revenue would grow at 7%, 6%, 5%, 5%. 5% Y/Y over the next 5 years. Conservative given POT’s historical Y/Y revenue growth rates
• EBIT Margins have hovered between 30% and 45% over the last 5 years. Decided to go with an 35% EBIT margin going forward which isn’t overly aggressive.
• CAPEX intensity is a key variable in this valuation. Historically POT has had a high CAPEX intensity due to investment in new production. This is all growth CAPEX. According to POT’s guidance the CAPEX intensity should come down over the next couple of years and level off at about $500M per year which will be all maintenance CAPEX by 2013.

Based on an 8% discount rate I calculate an estimated fundamental value per share of $45.79. Compared to the market price of $45.40 at market close on March 16th, 2012 it appears that POT is fairly valued.

Download (PDF) my valuation report for POT at the link below.

PotashCorp – DCF Stock Valuation – 2012-03-16

Recommendation

Given that POT seems to be fairly valued at the current market price I am going to hold off on buying the stock for now. I require an additional margin of safety and will wait until it gets a bit cheaper (if it ever does) before I decide to buy. With a 25% margin of safety my buy in price would be ~$34.34.

Thoughts on POT?

Disclosure
I do not currently own any shares in POT