Potash Corp (POT) Q3 Earnings Preview: What's In Store?

Potash Corp. (NYSE:POT) is set to release third-quarter 2016 results before the opening bell on Oct 27.

The fertilizer giant’s adjusted earnings of 18 cents per share for second-quarter 2016 matched the Zacks Consensus Estimate. Lower prices hurt margins across its potash, nitrogen and phosphate businesses. Revenues fell by double digits on weak fertilizer prices and missed expectations.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Potash Corp., in its last earnings call, reiterated its 2016 potash sales volumes guidance in the range of 8.3-8.8 million tons and said that it expects lower prices earlier in the year to weigh on the results for the balance of 2016. The company now sees potash gross margin to be in the $400-$600 million range.

Potash Corp. expects a weaker price environment to hurt its nitrogen and phosphate segments through the remainder of 2016. It lowered the combined nitrogen and phosphate gross margin outlook for the year to the $400-$550 million range.

The company also lowered its 2016 earnings guidance to 40 cents to 55 cents per share, including notable charges through the first half of 11 cents per share. For the third quarter, the company expects earnings to be in the range of 5 cents to 10 cents per share.

Potash Corp. is reeling under the effects of the depressed prices of crop nutrients. Prices for potash continue to be hurt by elevated supply. Depressed global energy prices and higher supply have also contributed to a softer nitrogen-pricing environment. A challenging pricing environment may continue to weigh on the company’s September quarter results.

The broader fertilizer industry remains hamstrung by a slew of headwinds including low prices of nutrients and depressed farm income. The prevailing softness in agricultural commodity pricing remains a concern for fertilizer companies as it is hindering fertilizer use by farmers given the adverse effect of lower crop pricing on growers’ income. A weak crop pricing environment has created uncertainty about potash consumption.

In a major move, Potash Corp. and Agrium (NYSE:AGU) agreed to combine their businesses last month to create a fertilizer powerhouse with a pro forma enterprise value of $36 billion. The proposed merger would create the world’s largest crop nutrient supplier and the integrated company will be better placed to counter the headwinds in the crop nutrient markets.

The combined company will also be better positioned to serve customers and growers with low-cost, high-value products and services and complementary assets. The integrated company is expected to generate as much as $500 million of annual operating synergies. Roughly $250 million of these synergies are expected to be achieved by the end of the first year following the completion of the transaction. We expect Potash Corp. to provide an update on this deal in its third-quarter earnings call.

Earnings Whispers

Our proven model does not conclusively show that Potash Corp. is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. This is not the case here, as you will see below:

Zacks ESP: The Earnings ESP for Potash Corp. is +11.11% as the Most Accurate Estimate stands at 10 cents while the Zacks Consensus Estimate is pegged at 9 cents.

Zacks Rank: Potash Corp. carries a Zacks Rank #4 (Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some stocks in the basic materials space that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter:

The Chemours Company (NYSE:CC) has an Earnings ESP of +25.71% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Teck Resources Limited (NYSE:TCK) has an Earnings ESP of +4.55% and carries a Zacks Rank #1.

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