Potash Sell-Off Overdone - Citi

Like every other commodity company, shares of Potash Corp. of Saskatchewan (POT) have been clobbered in recent weeks amid concerns about a global growth slowdown. They're down 25% from the record levels reached in June.

Brian Yu, an analyst at Citigroup Global Markets, thinks that global growth concerns do not apply as strongly to fertilizer as they do to metals or oil and gas. Put another way, the sell-off on Potash Corp. is overdone, he wrote.

"The market has failed to recognize that demand for grains rarely cycle... and has shown little historical correlation with economic activity. The last time we checked, fertilizers and grains are not industrial metals," he wrote in a note to clients.

Mr. Yu added Potash Corp. to his selection of top picks, with a target price of $264.00 (C$280.26). He noted that North American potash producer inventories fell 10% in July, and that demand remains strong in nitrogen and phosphate markets as well.

He sees three potential catalysts for a rise in Potash Corp.'s stock price: leverage to rising ammonia/nitrogen prices, a favourable potash contract settlement with China in the fall or winter, and the likelihood that the company's earnings will outperform analyst estimates in 2009.

"[Potash Corp.] is discounting a far worse earnings scenario than fundamentals indicate," he wrote.

Comments

[Randy Fay:]

Certainly nothing new here, though I agree with the conclusion.

2008 Aug 18 07:13 PM

[Invisible Hand:]

the hedge funds have a hold of this stock and play it with oil and the other commodities. Therefore with commodities stocks selling off so will potash.

2008 Aug 18 07:43 PM

[Invisible Hand:]

Hedge funds have a hold of this stock and whip it back and forth based on the direction of oil, gold, and the dollar. Fundamentals don't count right now. I predict another sell off with oil going down to the 80's. I base this off of lower inflationary expectations going forward. China is the big player that could change this picture. If news comes out that China is back on track to levels of 9 to 10 % growth then the commodity bull is back on.

2008 Aug 18 07:49 PM

[hollowman:]

KSu, I agree that a lot of what we've seen in ag names is due to the funds. In particular, they have been liquidating their holdings in ag names to cover their losses in energy.
However, I think that oil prices have far less downside risk, and it is well known that China will start next year with a huge deficit of fertilizer. This is very bullish, and will keep potash prices high for the foreseeable future.

2008 Aug 19 01:49 AM

[el zorrow:]

start to accumulate now......agrium in particular...cheap....... make sure you also hold NOV and PWR.///the bottom is here.....one more major drop,,,buy slowly....did we mention GILEAD and QCOM? BUY NOW>

2008 Aug 19 03:24 AM

[Invisible Hand:]

Commodity prices soared this year due to the falling dollar, emerging market growth, and hedge funds. When the dollar started rising this reversed the others and it led to where we are today. Corn rose to all time highs this year which fuelled the growth of the ag stocks and the reverse has happened as corn has come off. I agree with your comments that from a fundamental basis this stock is solid , and therefore if you have a three to five year time horizon don't worry this stock will perform. On the other hand, if you have a shorter time horizon or are looking to cash in on previous captial gains, the trend is not going north it's going south. Fundamentals are trumped by the trend in the short run. The reaction to the last earnings numbers is proof to my assertion. Oil goes to 80 before it reaches 150 and potash goes to 158 before it reaches 240.

2008 Aug 19 04:15 AM

[John-Galt:]

Potash has already been at 158 a few days back. I bought some at 160 and will DCA in for more at either 180 or 140. Emerging economies will continue their trend to more protein foods regardless of whether they drive to KFC or cook at home. Energy and food will decouple on the downside, but they may have already done so.

2008 Aug 19 07:32 AM

[Tim Plaehn:]

Quote: ""The market has failed to recognize that demand for grains rarely cycle..."

However, grain prices have a very strong cyclical trend and fertilizer prices tend to follow grain prices. A few bumper worldwide crop yields could push prices to levels of just a few years ago and a third of current prices.

2008 Aug 19 08:43 AM

[Norman Lepo...:]

The article as well as the comments are very informative. I am holding my POT.

2008 Aug 19 09:32 AM

[OldGuard15:]

What ever happened to buy on the dips? I see guys like Cramer saying to buy when everyone else is selling. Why doesn't this apply to POT?

2008 Aug 19 01:34 PM

[Urbane Gori...:]

Agree with OldGuard15... This doesn't look like a recovery quite yet.. At very least, wait till it starts to move back up a little..

jegan ;-)

2008 Aug 19 02:09 PM

[trick:]

I would agree that the broad commodity sell-off presents a good opportunity to purchase well-managed fertlizer companies. An Australian equivalent is Incitec Pivot. Further, I am positive on the outlook for corn and wheat prices given that inventory levels of these are well below their historical trends.

2008 Aug 19 06:32 PM

[titans:]

the sell-off in AG stocks are done when the BIG BOYS say it's over, not when citi says so.citi should concentrate on their own stock !!..I told the AG players 6 to 8 weeks ago to take your profits.I got burned with the uranium sector in 2007 & warned you guys the same thing would happen here as well.Instead I got a few wise-ass responses from elated AG players.Fundy's don't mean jack when the BIG BOYS want to take their ball home & not play anymore-- you're left holding the bag.....these stocks are dead because changes are happening with the new PRESIDENT and the sector will be hurt.THE GAME FOR THIS SECTOR IS DEAD...TAKE YOUR PROFITS & RUN....THEY ARE "NOT" MAKING NEW HIGHS !!!!!!!!!!

2008 Aug 19 08:30 PM

[trick:]

disclosure: long IPL

2008 Aug 20 12:10 AM