Citi analyst Brian Yu has named Potash (POT) as a Citi Top Pick. He believes the sell-off on POT is way overdone. At 7x core ’09 earnings, Yu believes investors are discounting a far worse earnings scenario than fundamentals indicate.
Friday data from the TFI [The fertiliser Institute] showed that North American potash producer inventories fell by 10% mum in July to ~1.0 mln tonnes (35% below the 5-year average), and last week’s settlement of a phos-acid contract with India at +16% QoQ to $2,310/tonne illustrates solid demand. Even nitrogen prices continue to surprise to the upside.
POT shares have suffered along with the rest of the materials/energy sector as global growth concerns mount. However, the market has failed to recognise that demand for grains… has shown little historical correlation with economic activity. The last time we checked, fertilizers and grains are not industrial metals.
We see catalysts from 1) near-term earnings leverage to climbing ammonia/nitrogen prices (19% of profits); 2) a favourable potash contract settlement with China in late-08/early-09, lifting delivered prices closer to spot values of $1,000/tonne vs ~$650/tonne, and 3) the lagging Street earnings estimate of $21.28 in ’09 vs our estimate of $22.25.
Bears will point to risks from the unwinding of commodity/currency trades and a global slowdown, but corn seems to be stabilizing around $5/bu on low global inventories; the USDA recently raised their ’09 grain demand estimates; and meat prices are hitting highs.
Citi reiterates BUY on Potash (POT) and names the stock a Top Pick, target $264.
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