Potash Corporation (POT) $2 Billion Share Buyback

Wednesday, November 17, 2010

PotashCorp rail carPotash Corporation of Saskatchewan (POT) announced last night the authorization of a $2 billion share buyback plan. At yesterday's closing prices the buyback could represent approximately 5% of shares outstanding. While the company has a full year starting tomorrow to execute the repurchases management intends to complete the program by the end of 2010.

Analysts have seemingly come on board in a big way following BHP Billiton's (BHP) withdrawal of its bid for PotashCorp after Canadian authorities determined that the acquisition was not in the best interests of the Canadian people. Just this week we've seen CIBC raise shares of POT to sector outperform with a $160 price target, RBC Capital reiterate outperform and raise its target to $170 and Barclays reiterate overweight and raise its target to $160.

While the majority of analysts overall still rate the stock a hold, management is signaling a strong faith in the company's future and indicating the belief that the company is undervalued at current prices. Personally, I am a big believer in the fertilizer story and potash in particular. I previously wrote a more detailed report on the company and shares have traded a few percent lower since publishing. The $140 price level was previous support but the market's weakness coupled with a sizable pull-in for many grain markets shares fueled selling pressure.

As a side note, there has been quite a bit of talk about merger arbitragers and the belief that there are pent up sellers yet to exit. This does not make much sense to me though as the bid was $130 and shares of POT immediately traded well above ranging between $140-150 for over two months. I don't see what arbitrage money would be present as there is considerable unknown risk with shareholders indicating that the bid was too low.

I believe PotashCorp's futures is very bright and at 17x management's low-end projections of $8.00 EPS guidance shares appear cheap relative to the 39% growth this represents. Add a reduction of shares outstanding by 5% and $8.00 turns into $8.42 per share. I am excited about PotashCorp's continued execution across its business lines and expansion of production capacity. The company looks very well-positioned in the attractive global agriculture story.

Brandon R. Rowley
"Chance favors the prepared mind."

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