Potash Corp. (NYSE:POT) of Saskatchewan has seen its stock rise from a close of $104.49 per share to just over $115 per share last week. The fertilizer company's stock has traded between $63.65 and $126.47 per share in the last 52-weeks. But is the stock a good buy on fundamentals?

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A Dust Bubble Scattered?
A quick review of the last couple of years in the agriculture business found a startling commodity bubble in fertilizer. Not so long ago - 2008 in fact - Potash Corp. earned $11 a share for its fiscal year, but earnings fell to $3.25 a share in fiscal 2009. Prices for potash fertilizer had run up from a relatively stable $100 per ton in 2003-2004 to its current price of approximately $580. Potash Corp.'s stock price reflected these changes, as it shot from under $30 a share to the low $200s during the boom.

The Stock's Fundamentals
The boom price in the $200s saw Potash Corp. trading at a PE of roughly 20. Now the multiple is about 35 times earnings, at over five times book value and an almost punitive dividend.
How about forward earnings? The company is calling for $4 to $5 earnings in 2010, less than the $6 analysts had expected. The forward multiple on this outlook would put the PE at 23 to 28.75, still pricey in a market where historical PEs have gone awry since the spate of negative earnings.

More important, this multiple exceeds the 20 PE multiple Potash Corp. carried at even its fullest earnings. So on the face of it, fundamental investors might want to simply say the stock is overvalued right now at its $115 market price. But things are not so simple.

The Fertilizer Biz Heats Up
Terra Industries (NYSE:TRA) has recently been purchased by Yara Industries for $4.1 billion. CF Industries (NYSE:CF), which had tried to buy Terra for $2 billion, has been pursued by Agrium (NYSE:AGU) for nearly a year. Earlier this year, Vale (NYSE:VALE) bought Bunge's Brazilian fertilizer operations. Takeovers and mergers are in the air of this hot industry.

Recently, Canpotex, the fertilizer sale consortium for the major exporters, completed a potash deal with India at a sale price of $370 a ton. This is too early to signify a trend, but it is important to note the activity in any commodity. Potash fertilizer inventories have also largely been worked down.

The Industry And The Stock
Long-term - five, ten and twenty years ahead - the agricultural fertilizer business will have to see continuing demand. The world's population continues to grow and food is in increasing demand, obviously, more so in the developing world. Given the prices edging up for potash fertilizer now, the consolidation in the industry and the hope of a rebound in the business in 2011, many would say Potash Corp. is a good stock to buy now.

Even allowing for an upsurge that won't take the company to flush levels as in 2008, an earnings estimate over $7 per share for 2011 would provide investors with a long-term investment play which may turn fairly profitable.

A Discipline To Go By

On the strictest discipline of fundamental investing, despite the intriguing signs in the fertilizer industry, the stock is overpriced right now. The return to the $7 or even higher EPS in a year or two would be worth waiting for, but is far from guaranteed. Some will want to buy the stock at a premium now and wait it out, which, while not as disciplined, may work out well.

The fertilizer industry should still see fluctuations between now and 2011 or further out, so this should give the fundamental investor another opportunity to capture Potash Corp. shares at a more favorable price, more in line with actual, not projected, earnings and results. (To learn more about fundamental analysis, check out Fundamental Analysis For Traders.)

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