Slide In Agricultural Stocks Doesn't Reflect Fundamentals

CALGARY (CP) -- Salman Partners analyst Raymond Goldie said the sell-off of Potash Corp. of Saskatchewan (POT) and Agrium Inc. (AGU) are due to a disappointing quarterly report from an American peer.

But Goldie said the lacklustre results released Wednesday night by Mosaic Co. (MOS), a Minnesota-based fertilizer producer, were due to problems specific to the company, not the industry.

Another analyst also downplayed fears that a U.S. economic slowdown would have a severe impact on U.S. corn production - a major use of fertilizer - because of government subsidies.

Nevertheless, shares of Potash Corp. of Saskatchewan were off more than 19% around midday Thursday, falling to $110.

Calgary-based Agrium, another fertilizer producer that now has an extensive retail presence in the United States, plummeted nearly 22% to $45.68.

And Viterra Inc. (VT), created last year by the merger of Saskatchewan Wheat Pool and Agricore United, saw its shares fall 5.1% to $9.49.

Viterra is a major seller of fertilizer, pesticides, seeds and other agricultural products as well as Canada's biggest publicly traded grain handler.

All three companies had been feasting earlier this year on high world prices for grains used for food, animal feed amid higher fuel costs and growing demand from rising economies in Asia.

For the period ending Aug. 31, Mosaic earned $1.18 billion, or $2.65 per share, compared with profit of $305.5 million, or 69 cents per share, during the same period a year ago. Revenue more than doubled to $4.32 billion from $2 billion.

But that missed Wall Street expectations, as analysts polled by Thomson Financial, on average, expected profit of $2.94 per share on revenue of $4.11 billion.

Goldman Sachs analyst Edlain Rodriguez pulled Mosaic from his "Americas Buy List," downgrading the stock to "Neutral." He also cut his six-month price target by $35 to $115.

Mosaic shares dropped $23.12, or 34 per cent on the New York stock market, to $43.71. They closed at $67.51 on Wednesday.

Also Thursday brokerage Merrill Lynch downgraded the potash sector from "buy" to "underperform" and said it expected earnings to fall.

But Goldie said Mosaic's miss was an isolated problem.

He said Mosaic was denied a permit to mine phosphates in Florida and is fighting the county council to have that decision reversed - a development that should, in theory, be positive for its Canadian competitors.

The prices of fertilizers on commodities markets are not to blame either, Goldie said.

"There has been weakness in phosphate prices, but it's tiny. Prices are still five times what they were a couple of years ago," he said, adding that nitrogen is seeing its usual seasonal drop.

"The fundamentals of the potash business remain very strong."

But RBC Capital Markets analyst Fai Lee reduced his share price target for Agrium from $145 to $105 last week to "reflect bear market conditions."

"While fertilizer stocks have traded down with the broad commodity stock sell-off, we expect sector valuations to eventually rebound albeit at a slower pace than the recent past," Lee wrote in a note to clients Friday.

But Lee also said RBC remains positive about Agrium's outlook.

"Agricultural and fertilizer fundamentals are still very strong with high crop prices, low grain inventories and high fertilizer prices. Fertilizer supply/demand fundamentals remain positive over the medium term."

Agrium announced Wednesday it would buy back five per cent of its shares and that there could be more repurchases to come.

"We believe the current price of our shares does not reflect Agrium's achievements nor our strong future prospects," said chief executive Mike Wilson.

(c) The Canadian Press

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