Even though Potash (POT) reported a strong Q2 and raised its 2008 earnings guidance, the share price declined by 3.3% yesterday. RBC is perplexed and believes the decline likely “reflects selling by short-term momentum investors switching out of commodity stocks.” They in turn see a great entrance point for long-term investors:
Notwithstanding the potential for short-term share price volatility, we believe PotashCorp’s current valuation represents an excellent buying opportunity for investors with a longer-term perspective. Strong earnings growth potential, a 2009E P/E multiple of 8.9x and 2009E free cash flow of $7.3 billion ($24.13/share) represent a few of PotashCorp’s many attractive investment attributes. Based on its long-term growth potential and the implied all-in return to our price target, we view PotashCorp as extremely attractively valued.
No cyclical downturn here:
Based on our supply and demand outlook, we generally expect fertiliser market conditions to remain robust through the medium term. With respect to concerns over the sustainability of high fertiliser prices, PotashCorp’s management indicated during the Q2/08 conference call that they have not seen any signs of demand destruction under the current fertiliser pricing environment.
RBC reiterates OUTPERFORM on Potash (POT), target $375.
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