Will Potash Corporation Stock Make a Comeback in 2016?

Image source: Potash Corp.

2015: A disastrous year for Potash

Potash’s weak operational performance and muted outlook

played a key role in driving its shares lower in 2015.

Why the stock crashed

Falling top and bottom lines

So why did Potash’s sales and profits fall in 2015?

A sharp drop in farmers’ income -- a key driver of fertilizer consumption -- as crop prices declined

Lower demand from offshore markets like Latin America and Asia as a result of currency fluctuations and weather disruptions.

Falling nutrient prices, such as of nitrogen, which contributes nearly 42% to Potash’s gross margin

A sudden change in the Government of Saskatchewan’s potash royalty scheme hurt profits

Several headwinds are to blame

So does that mean Potash shares could fall further in 2016? Let’s

find out.

Lower price forecasts for corn and soybeans on swelling inventories

Net farm income for 2015 estimated to touch 13-year lowsPotash’s 2015 earnings per share projected to be at least

9% lower from 2014. Both Potash and Mosaic lowered their full-year guidance for potash sales volumes and gross margins in Q3

Uncertainty in international markets

The bear case

Advanced closure of Potash’s Penobsquis mine in New Brunswick and temporary shut down of three mines last month signals greater pain ahead

Fears of Potash overpaying amid a turmoil in potash markets loom large if it acquires German producer K+S, a company it relentlessly pursued in 2015

The bear case (cont.)

Ramping up of its low-cost mine at Piccadilly should boost Potash’s margins

Strong potential growth in free cash flow as Potash winds up a multi-year expansion program

Growing shareholder returns -- Potash raised its quarterly dividend by 9% last year. The stock currently sports a 9%-plus dividend yield

The bull case

Foolish takeaway

The bears win the case, given Potash’s challenging business conditions. However, the downside in the stock appears limited, considering that its key valuation metrics, including price-to-earnings, price-to-sales, and price-to-free-cash-flow, are at five-year lows. In fact, I wouldn’t be surprised if 2016 proves to be Potash’s turnaround year.

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