Due to Market Conditions, Fertilizer Stocks Slashed

On the surface, nothing has changed for fertilizer giants Agrium Inc. (AGU) and Potash Corp. of Saskatchewan (POT) - they continue to generate record earnings bolstered by very high prices. However, the equity market carnage and collapsing investor sentiment has forced RBC Capital Markets analyst Fai Lee to rethink his forecasts for the two companies.

Even though he is still very bullish on the fertilizer sector, Mr. Lee cut his target on Agrium to C$105 a share (from C$145) and on Potash Corp. to C$250 (all the way down from C$375). The lower targets reflect multiple compression on the fertilizer stocks because of higher market risk, portfolio rotation tied to the broad sell-off in commodity stocks, and distressed liquidations by some investors.

Mr. Lee considers these new targets "reasonable" in the context of the current market conditions, but noted that his general outlook for the sector has not changed.

In notes to clients, Mr. Lee wrote:

While fertilizer stocks have traded down with the broad commodity stock sell-off, we expect sector valuations to eventually rebound, albeit at a slower place than the recent past.

Mr. Lee noted that both Agrium and Potash Corp. are trading at low price-earnings multiples. If they continue to generate strong cash flows while their share prices underperform, he wrote that both companies could look at buying back stock (something Potash Corp. is already doing).

He still has "buy" ratings on shares of both companies.