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Don't Buy Potash's Rebound

Summary

Potash Corp. sold off after cutting dividends and reporting weak results.

Stock rebound unlikely to hold.

Stock trades above implied fair value.

Investors may excuse Potash Corp. (NYSE:POT) for cutting its dividend by a whopping $0.15 per share to yield just 2.5 percent. The company benefited from strong product demand, but it still faced weak pricing and sales volume in the second quarter. The stock is stuck in a trading range between $16.00 and $17.50. The key investors should ask is why the stock is not falling sharply after the dividend cut.

Potash suspended activities at the Picadilly Mine in New Brunswick in January and decided not to go ahead with the Prince Rupert Terminal in June. This had a negative, one-time impact on earnings and will lower operational costs. In the second quarter, the cash cost for Potash fell by 15 percent, to $72 per ton. Based on Potash sales volumes of up to 8.8 million tons, the company expects it will earn between $0.40 to $0.55 a share. At a recent share price of $16.25, Potash trades at a forward earnings multiple of between 29.5 and 40.6 times. At this multiple, the market is assuming stable to rising nitrogen and Potash prices.

Potash believes commodity prices may stabilize in the United States...


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