August 18, 2010 | In: Basic Materials

Everyone Wants Some POT

POT (Potash Corporation) had a volume of 47 million yesterday. And today it might be even higher. Here’s why, a company called BHP, trying to purchase Potash, has made a hostile bid to buy the company at $130/share (or $40 billion). The deal will make BHP the largest fertilizer producer. Of course, Potash doesn’t want to sell at this price, claiming that the company is largely undervalued. Are they playing hard to get, or is it really the case?

Potash is a successful fertilizer and is produced in mines in Saskatchewan (Canada). Fertilizers are increasingly in demand right now because of all the natural catastrophes in the world, especially drought. Additionally, world wealth is increasing, China and India is richer, and so are most developing countries. This means that people will consume more food. More food needs more crops, and more crops need fertilizers.

POT peaked 2 years ago at $230, could we have a similar rally right now? Nothing is certain. Is $230 a fair or exaggerated value? Apparently 2 years ago it was exaggerated, as the stock went down in a few months to almost 25% of that price. But how about now? Well clearly the whole world needs more food at the moment, but a surge to $230 is less likely to happen, until the world economy really picks up.

Now the important question is, where will the stock go in a month from now?

The stock is currently trading at $147, up $4 from yesterday, and $35 from 2 days ago (that’s 32%). BHP’s hostile bid is at $130/share. This means that BHP will have trouble acquiring the company at this price, and it needs to raise the bid. Apparently $160 might be a reasonable offer from Potash’s perspective, but probably not for the market. Further negotiations might lift the price up beyond the $160, which means that the bid has to be probably increased. A vicious circle for BHP if Potash keeps playing the “I’m worth much more than you think” game.

But what will happen if BHP gives up on the stock? Major selloffs will happen, and the stock probably will erase all the gains. And what will happen if BHP maintains its position? One might think that it may end up like PLA (which was on the verge of going private a bit more than a month ago), slowly losing value every day. But Potash is not losing money like Playboy, it’s making money, so it might slowly go up.

Whatever it is, $147 is just too much for an entry point to this stock. If you’re buying now then you’re buying at peak. The stock is trading now at 32 times the earnings, compare that to a bullish and steady stock like AAPL, trading at 20 times its earnings. Consider that in your calculations.

1 Response to Everyone Wants Some POT

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POT: Others Are Interested Too! « Fadi El-Eter

September 8th, 2010 at 11:27 am

[...] have written earlier about the hostile bid that BHP made to acquire Potash of Saskatchewan. BHP back then offered $130/share to buy the [...]

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