Investors dug out of Potash Corp. of Saskatchewan (POT) on Monday after the world's largest fertilizer producer cut its full-year earnings forecast.
Shares dropped 5.7% in midmorning trading after the Saskatoon-headquartered company said it now expected to earn $3.25 to $3.75 a share for 2009, dropping from a July forecast range of $4.00 to $5.00 a share.
"The change primarily reflects lower-than-forecasted potash sales volumes due to continued slow demand and limited restocking by fertilizer distributors around the world," the company said in a prepared statement.
The company said that global potash producers have cut output by nearly 20 million tons over the last 12 months, and that at the same, there have been deep reductions in potash levels in soils. Those developments could jeopardize crop yields in markets that don't have healthy long-term fertilization and agronomic practices, such as the United States and Australia, said Potash. It added that a major rebound would be required in 2010, which would boost demand significantly.
Canaccord Adams analyst Keith Adams backed the company's sentiments, and advised agricultural fertilizer investors to reduce their near-term exposure to companies that rely on potash for significant revenue. Potash Corp. is the world's largest producer of potash, a potassium carbonate compound that supplies crop soil with potassium in water-soluble form.
"Once into 2010, we are comfortable with potash exposure and believe the potash weighted names will outperform within the sector," he wrote Sunday.
Other analysts took a more skeptical view.
"This clearly wasn't good news," Sterne Agee analyst Mark Connelly wrote Monday. "Against a backdrop of high U.S. crop yields, weak grain prices, falling farmer profitability, and lack of price stability in potash prices, we continue to look for a 2011 recovery vs. the 2010 expectation that producers are looking for."
Bottom Line: Buy
There may be more downside for this stock, but it offers long-term investors a chance to cultivate a belief that agricultural prosperity will pay off in another season.
Perot Systems (PER) shares got rebooted sharply Monday after it was announced that Dell (DELL) would buy the IT services provider for $3.9 billion.
Though the deal had been long expected, shares of Perot skyrocketed 65% in midday trading, reaching just below the $30 a share offering price. Dell shares dipped 4% on the news.
Perot, which had $2.8 billion in revenue in 2008, is a long-established information technology service provider for health-care and government clients. With the purchase, Dell gains a foothold in a growth segment of the technology sector. Competitors such as IBM (IBM) and Hewlett-Packard (HPQ) have either shifted their business models away from personal computer hardware revenue, as IBM did when it sold off that business to Lenovo, or expanded aggressively through acquisitions. Hewlett Packard in 2008 bought EDS to try to capture some of IBM's growing services market share.
Dell and Perot have an established working relationship, which should help in the short-term transition period, said Dell Chief Financial Officer Brian Gladden on a Monday conference call. He added that the acquisition was part of a larger effort to expand Dell’s IT services. "We were very focused on getting a great anchor acquisition, which we believe we did," he said.
Joseph Vafi, an analyst at Jeffries & Co., said Perot's health-care niche will be particularly active over the next five years, making it a smart pickup for Dell. The government will push an estimated $20 billion in stimulus money to increase the use of electronic medical records, and "Perot is really well positioned to capture some of that spend," he says. In the wake of Hewlett-Packard’s acquisition of EDS, Dell needed to play catch-up, Vafi adds: "They needed more in the service capacity that wasn't just break-and-fix, and that kind of lower-end IT stuff. If you look at IT budgets, for every dollar that is spent on hardware, at least another dollar comes from services." The medical records niche helps justify the deal's price tag, he says.
Monringstar analyst Rick Hanna disagrees.
"It appears to me to be a pretty rich premium, and Dell has a lot of hard work to do to make sure this doesn’t destroy shareholder value," he says. "This is a pretty narrow niche, so it expands Dell's footprint, but it doesn’t change the game."
Bottom Line: Hold
The deal looks secure enough to wait for the final upside for Perot shares, and it's too soon to know if Dell's gambit will yield the desired results.