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Six months ago, Potash Corp. of Saskatchewan - the world's largest fertilizer company - peaked at $240 a share. Today it's $56, only three times projected earnings per share for 2009.
Yes, slumping grain markets and credit-crunched farmers have sent fertilizer prices tumbling. And yes, it's possible - likely even - that analysts will trim 2009 earnings estimates further. But a P/E of three means there's margin for error. Next year's earnings could straggle in 50% below expectations, and Potash Corp. would still be reasonably priced. The current price assumes the company will earn less than $5 a share in 2009, Citigroup analyst Brian Yu recently noted. The analyst consensus for 2009: $16.
The long-term case for higher grain prices - and thus stronger fertilizer demand - remains intact despite the global recession and withering commodities markets. Government mandates mean biofuel production will continue to rise. Ethanol will consume 33% of this year's U.S. corn crop vs. 23% of last year's. Global population growth and an expanding Third World middle class are expected to lead to a 10% rise in food-related grain demand by 2017.
Potash Corp. is well positioned compared with its competition. Prices for fertilizers based on nitrate and phosphate have plummeted, while those for potash (its specialty) are at record levels. One reason: It's brutally expensive to enter the business, as potash mines cost $2 billion to $4 billion to build.
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Last updated December 17 2008: 10:12 AM ET