The proportion of K + S (NASDAQ: KSAG88) has had an impressive run. Just two years ago you could buy them for 5 to 10 euros. In April, it cost more than 30 euros, even 36 euros at the top. Despite the good numbers that supported the increase, I thought it was wise to wait for a chill. It has now arrived – which now speaks for an entrance.
K + S’s massive annual profits are not the most important thing
The first thing investors look at, of course, is the valuation ratios. Operationally, things are going really well at K + S. Fertilizer prices have risen, while costs are rising only moderately. Chemical fertilizers are far more energy-intensive than the extracted alternatives that K + S offers.
This means that sales this year should increase to well over DKK 5 billion. EUR in a highly profitable way. With a market value of just over 4 billion euros, we are talking about a price / sales ratio of 0.8 and a price / earnings ratio of just 2.5.
If you take the reciprocal of this, you get an annual return of 40% with full profit distribution – if K + S can maintain the profit level. The same applies if K + S can use saved profits with profits.
As investors on the stock exchange not only focus on the current figures, but sometimes also look far into the future, this is of course what matters: Can K + S save the current tailwind into the future or must we expect a sharp drop in profits in the coming years?
The stock market is calculating with a sharp drop in profits
At prices around 20 EUR (July 7), K + S is traded as a value trap. There are a number of reasons for this, and most of them have to do with Russia’s war.
– Firstly, Russia was able to succeed in creating new sales channels in order to once again increase fertilizer exports. The supply bottleneck would relax a bit and prices would fall.
– Second, the reduced natural gas deliveries may mean that K + S has to limit its production in Germany.
– Third, war and inflation may lead to the overthrow of the increasing demand for potassium fertilizers.
Overall, it must be assumed that the fertilizer market will level off in one way or another in the coming years. On the one hand, investment is being made worldwide to expand capacity. Here, the lithium boom also plays a role, and fertilizer is produced as a by-product during extraction. On the other hand, farmers will look for ways in which they can use fertilizer more efficiently or switch to alternatives.
The current friction in K + S ‘core business will therefore come to an end.
How K + S would like to stabilize
K + S seems to practice good risk management. The need for natural gas until the end of 2024 is almost completely secured in the futures market. CO2 certificates have even been made until 2026.
Even the rising interest rates can not do much damage to K + S, as loans that fall due are repaid from the cash flow. This means that K + S is more likely to improve its financial result in the future, especially as the markedly improved credit rating ensures better access to fresh capital.
Efforts to increase sustainability and reduce the cost base through targeted investments in the efficiency of locations and logistics should also make K + S more robust if sales conditions deteriorate.
As the expanding Canadian site shines with particularly low production costs, K + S will also be able to at least partially compensate for any price reductions through volume increases.
Equally important is that K + S wants to position itself more broadly in order to be less dependent on winter business and ordinary potassium fertilizer. This includes strengthening the presence in the Asian markets, further developing industrial applications and developing new business areas with a higher share of services.
You can not go wrong here
Management consistently uses the huge cash flow to make K + S suitable for the future. Future crises will hit the company much weaker. The balance is extremely strong, and the medium-term outlook remains good – apart from the natural gas risk.
This does not mean that K + S will make billions in profits every year. But there are many indications that this year will not be the last.
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Ralf Anders does not own any of the mentioned shares. The Motley Fool does not own any of the listed shares.