Potash Corp.: No Liquidity Problems Here

by: Jean Emond October 10, 2008 | about stocks: POT    

Jean Emond

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The problem with some analysts these days is that they have no clue of financials, accounting, financing decisions, investment decisions, dividend policies, buybacks.....they are simply analysts who call out a target based on what other analysts have concluded.

Being an accountant by profession, a banker by day and university finance professor by night, I can safely say that Andrew Snyder's liquidity analysis is completely out of line, although his ratios are correct.

Potash Corp. (POT), on the surface, has a negative current ratio, negative working capital as of June 30, 2008. This is a major shift from December 31, 2007 and due entirely to the repurchase of close to $1.5 billion of company shares which consumed cash. They did this as they thought this was the best investment with a positive net present value. Their cashflow will quickly replenish this situation and we should not be alarmed with this situation.

To say that the company has a liquidity problem is like saying an individual has a liquidity problem; although he is making $900,000 per year, his house is paid off, he has $5,000 in his bank account and owes $8,000 on his credit card.....yes, he is illiquid, but he can quickly offset this situation with his earnings or new long term debt on his house.

The stock is trading based on a $450 per tonne while the current price is $1,000 per tonne, and the company's President recently said he could get $5,000 per tonne, but did not want to go this route due to the possibility of killing demand.

I suggest that analysts like Snyder understand the full situation prior to publishing these types of articles.

Disclosure: Author holds a long position in POT

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This article has 8 comments:

  •  
    Oct 10 08:28 AM
    Thank you for putting this putz straight.
    Reply | Link to Comment
  •  
    Oct 10 08:30 AM
    Three cheers for this post, finally an intelligent remark on the financial thinking and actions of management who know how to use current information to provide valuable input and decision-making for future results. Way to go Jean!
    Reply | Link to Comment
  •  
    Oct 10 09:59 AM
    I talked with a farmer in central Ohio this past week who said that the fertilizer prices for next yer from Potash had doubled, he had to order now or be left out and get this -paid up front.

    Now there is a lot that you can read into that ....
    Reply | Link to Comment
  •  
    Oct 10 11:15 AM
    Your analysis is correct. The sky is not falling, it's a 1/2 price sale.
    Reply | Link to Comment
  •  
    Oct 10 08:05 PM
    This is a good article. I wish there are most professionals writing relevant articles. You should put the same articles on Invest18.com. It is a more of an educational site, and I think they welcome your writing.
    Reply | Link to Comment
  •  
    Oct 11 10:00 AM
    Thank you, Jean. I started buying at $130 and I now have a $108 average purchase price. I am holding firm and I have cash on the sidelines, should I need it. I am very concerned about the systemic issues facing our system, as a whole, but Potash now seems to be about as risky as my CD's (If things get so bad that Potash isn't needed, then cash in the bank won't be much better).
    Reply | Link to Comment
  •  
    Oct 16 05:49 PM
    But what if the credit card company demands immediate payment, won't accept the home as collateral, and wants to be paid now up front?

    These are unprecedented times. That being said I think POT is still in very good shape and represents a great layer in buy for those with a very long term horizon or a great day trade (long or short) for those with a very short term horizon.

    For those long stocks the real problem here are the hedge funds and investors who proped this stock up with leveraged money and now have to clean ship. When POT was trading at 200 it was still cheap relative to earnings. How can a company with a PEG under 1 be a bubble stock? The answer is that all stocks are bubble stocks to some degree. Those who get in early or those who get in later are fine as long as their continues to be people on the sidelines who think that the stock will go up. The moment the selling overwhelms the buying (seen by the breaking of key technical indicators) every stock that has gone up is on the wrong side of the bubble. It's just that simple.

    Earnings are just one indicator of stock demand.

    For that reason, as I have learned, when the charts turn and the trend is down it is usually time to get out unless one plans to invest for a decade or so or more and believes the price is good. No stock is an exception. They are all just pieces of paper and risk management, maximum loss limits, etc. must be predefined when getting in regardless of fundamentals when the charts do not point in one's favor (on the long or short side).
    Reply | Link to Comment
  •  
    Oct 16 05:50 PM
    propped
    Reply | Link to Comment
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