Unusual Options Activity
On August 19th, the POT Jan 2017 $20/$25 bear put spread was put on 6,000 times for a $2.09 debit. This was part of a rollout from Jan 2016 puts. Put activity was 8 times the average daily volume. He/she has the potential to make 139% on a close at or below $20 on January 2017 options expiration.
Fundamentals
This summer, Potash has been trying to acquire K+S, a German fertilizer and salt producer, for more than $8.6B, but they said that management and many shareholders are against the deal. In order for the $22B Canadian fertilizer company to make the deal happen it is likely going to require a $10B+ offer (especially after K+S’s strong Q2 results on August 13th). This would require a large amount of borrowing in order to make it work since Potash has about $450M in cash on hand.
POT trades at a P/E ratio of 14.49x (2015 estimates), price to sales ratio of 3.48x, and a price to book ratio of 2.45x. Earnings growth is projected to be flat (estimates continue to fall) and sales are likely to drop 10% to $6.4B this year. This could mean their hefty 5.76% dividend yield is in jeopardy of being cut (paying $317M+ each quarter), especially if a K+S deal does occur.
Shares of POT put in a double top around $36.00-$36.50 at the beginning of the year. Once deal talk for K+S was out in the public the stock started to break down below major support at the $30 level. On a measured move basis, it sets up for additional drop to $24 ($36-$30=$6; $30-6=$24). Right now we’re seeing a potential fall below the $2013 lows, which would likely mean a $24 print in short order.
Potash Options Trade Idea
Buy the Jan 2016 $23/$26 bear put spread for a $1.10 debit or better
(Buy the Jan 2016 $26 put and sell the Jan 2016 $23 put, all in one trade)
Stop loss- None
1st upside target- $2.00
2nd upside target- $2.95
