January 26, 2011 / 1:47 PM / in 7 years

PREVIEW-Potash Corp investors eye stronger 2011 forecast

* Wall St eyes Q4 EPS of $1.65; FY11 consensus view $8.89

* Investors eye upward revision in sales and EPS forecast

* Surge in grain prices has expectations running high

(Figures in U.S. dollars, unless noted)

By Euan Rocha

TORONTO, Jan 26 (Reuters)- Potash Corp (POT.TO), the target of a failed, $39 billion hostile takeover bid last year, is expected to post a big jump in profits on Thursday, driven by surging demand and higher prices for its fertilizer products.

But while analysts are taking strong fourth-quarter results as a given, the burning issue is whether the world's largest fertilizer maker can follow up on its marquee performance by whetting the market's appetite for more of the same in 2011.

Expectations for fertilizer demand in 2011 are already running sky-high, with farmers keen to capitalize on a recent surge in grain prices by increasing nutrient application.

That has put Potash Corp under pressure to ratchet up its already robust forecasts for earnings and sales, or risk turning off investors who have pushed its stock up more than 60 percent over the past year.

"We are hoping to see some good guidance for 2011," said Barry Schwartz of Baskin Financial, which owns about 40,000 Potash Corp shares. "The market would be very pleased to see Potash Corp boost its expectations."

In October, Potash Corp forecast 2011 earnings of $8 to $8.75 a share. Investors now have their sights set higher, as analysts are already calling for earnings of at least $8.89 a share, according to Thomson Reuters I/B/E/S.

"We think Q4 is going to be a pretty good report, but it isn't important," Schwartz said. "The important question is, are they going to be raising their guidance?"

Analysts will also pay close attention to the company's 2011 potash sales volumes forecast. Potash Corp, which sells more of its namesake crop nutrient than any other producer, has already forecast 2011 sales of 9.3 million tonnes.

Gleacher & Co. analyst Edlain Rodriguez points out that a 1 million tonne increase in potash shipments would boost Potash Corp's earnings by 75 cents to 80 cents a share.

"The question is, does Potash Corp have enough visibility right now to raise that 9.3 (million tonne) guidance to 10 million, or above?" said Rodriguez. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Fertilizer/corn price graphic: r.reuters.com/fur67r Fertilizer sector comparison: link.reuters.com/huv67r ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

SHARES STALLED?

The surge in grain prices and renewed concerns about food security have lifted shares even after the failure of the BHP Billiton's (BHP.AX) takeover bid last year. [ID:nSGE6AE01K]

After touching a 28-month high of $174.31 recently, the shares could now stall, some analysts say. The stock already trades at more than 18 times forward earnings-per-share expectations.

"I have a 'neutral' on Potash, because I think the upside is limited," said Rodriguez. "Some people have much higher expectations, but I think we are getting to the point where a lot of the good news is already embedded in the stock."

For the shares to rally, Schwartz says potash prices would have to climb further and overseas demand would need to rise.

"In our opinion, the price of the stock is going to pretty much hit a wall between $160 and $170 ... until we see a spike in potash prices well above the $400 (a tonne) range," he said.

While prices have jumped in North America to more than $550 a tonne, pricing gains on key overseas contracts have not kept pace. A recent deal with Chinese buyers settled at $400 a tonne. [ID:nLDE70C1BY] [ID:nSGE70J0DN]

"The market is still very tight and demand is good," said Rodriguez, who believes this could help potash producers push for pricing gains in markets such as Brazil and South East Asia later this year.

"We know what China is going to pay for the first half of the year. We have a sense of what India is going to pay," said Rodriguez. "So U.S. prices won't be moving up until overseas prices start moving higher." (Reporting by Euan Rocha; Editing by Frank McGurty)

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