What the Potash Buyout Tells Us
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The bidding war for fertilizer company Potash Corp of Saskatchewan (NYSE:POT) is getting very interesting. Last week, the company rejected a $34 billion buyout bid from mining giant BHP Billiton (NYSE:BHP). BHP countered by saying it would make the bid a $38 billion hostile bid, which means BHP takes its offer directly to the shareholders.

To counter this move, Potash Corp has been in talks with other companies to see if they can get the buyout bid higher. China's Sinochem and Brazil's Vale have been mentioned as having interest. And Potash's board is already saying that a "superior offer" is expected. That's good, because Potash Corp. currently has a market cap of $44 billion, and rising.

 

Now, this buyout process is interesting in its own merits. As a company, Potash is a cash cow, throwing off $1.42 billion in net earnings and $2.58 billion in operating cash flow on $4.9 billion in revenues. One might look at the forward P/E of 19 and conclude the stock was expensive. But when you consider that earnings would pay for the buyout in less than 20 years (based on forward estimates), maybe it's not so expensive.

 

But what does this buyout tell us about the current market?

 

Well, it tells us that the prospects for fertilizer are very good. It's obvious that growing populations eat more food. But it's less obvious that as the standard of living in a country improves, people choose to eat more meat. It takes 9 pounds of grain to make 1 pound of meat. So we might expect an exponential rise in fertilizer demand on steady population and income growth.

 

Of course, this dynamic is most obviously at play in emerging markets like China. I'd say it's no coincidence that one of the companies that may counter the BHP offer is Chinese.

 

Another thing this buyout process tells us is that the global economy is not as bad as off as some like to think. If companies believed that the economy (both U.S. and global) were headed back to recession, they wouldn't be making buyout offers now. They'd wait until prices were lower.

 

But we've seen a steady string of merger and acquisition activity over the last few months. $165 billion worth in the raw-materials space alone.

 

Also, don't ignore the fact that Potash/BHP saga is playing out in the commodities sector. Commodities are very sensitive to growth expectations. And while we've seen volatility in pricing for oil, copper and other commodities, base price levels indicate a growing economy.

 

Bloomberg reports that the 32 mining, seed and chemical companies on the S&P 500 trade with the highest P/E of any industry at 17.4.

 

As one chief investment officer said: If the market really believed the double-dip story, which I don't think the stock market believes, materials (commodities) stocks would not be doing this well…

 

With the exception of 2009, the last time metals and mining stocks traded so far above the S&P 500 in terms of P/E was 2004. That was right before a 5 year bull market in which the S&P 500 doubled. Before that was 1994, and the S&P 500 tripled in the next 6 years.

 

From this perspective, the strength in commodities and materials stocks may be forecasting a stronger economic rebound and a move higher for stocks.

 

Over the last 30 months, bond mutual funds have attracted $559 billion dollars. Domestic equity funds have lost $209 billion over the same period.

 

Now, with the latest ramp-job for bonds, the yield on the 10-year T-bill is 2.6.On the 2-year, it's .46.

 

At this point, we can rightly ask: How much lower can bond yields go?

 

Of course, we know that a market can remain irrational longer than even the deepest-pocketed investor can remain solvent, but still, now would seem like a good time to take some profits on bonds.

Until tomorrow,

Ian Wyatt
Daily Profit

P.S. My Global Commodity Investing service subscribes just made a 36% gain on Potash in the last two weeks. This kind of gain is the norm, not the exception for this service. I just released my latest research report, The Only 3 ETFs You Need for Profits. Click here to get ahold of this research today.





Posted 08-23-2010 2:41 PM by Ian Wyatt
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