Thursday, September 11, 2008

Potash (NYSE:POT): Actionable Call Alert - Merrill Lynch

Merrill Lynch is out with a bullish Fertilizer call noting the recent sharp fall in fertilizer sector valuation multiples is unprecedented, with share prices down 44% since peaking in mid-June. Firm attributes most of the decline to investor fears that the commodity boom is over as the dollar has weakened and energy prices have declined sharply. While corn prices have declined 31% since their flood-induced late-June peaks, fears of demand destruction from high fertilizer prices appear overblown. US corn growers would still be profitable with fertilizer costs twice current levels, by firm's calculations.

For the last month they have been saying that fertilizer valuations indicate that the market believes that earnings will peak in 2009 and decline rapidly thereafter. With little new supply set to come on line before 2011-12 depending on the nutrient and with a likely multi-year grain cycle sustaining high demand levels they believe that peak earnings are still several years away. One potential catalyst for the sector could come post this fall’s harvest as investors once again focus on the need for growers to raise global grain production to rebuild grain inventories which are hovering at 35-year lows relative to demand.

Potash supplies have tightened even further with the month-long strike affecting 30% of Potash Corp.’s production. Firm is trimming their Q3 EPS estimate for POT by $0.10 to $3.65 due to lower potash shipments. They believe Canadian producer supplies are now at all-time record lows, likely leading to further price increases this fall. Firm expects China to settle its 2009 contract with Canadian and Russian producers prior to year-end at $900/mt cfr, which could prove to be low.

Merrill is raising their 2009 EPS estimates for the potash producers.

Potash Corp (NYSE:POT) 2009 EPS goes to $23 from $22 with 2010 EPS going to $25 from $23.50.

Notablecalls: I'm putting my foot down here - I think the Ferts are going to bounce today. Plus, I suspect the bounce will have some more legs than first 30 mins of trading.

Potash (NYSE:POT) is my fav.

PS: MLCO is also out with a bullish Steel call saying the export price and domestic price have fallen approximately 15%, US HRC is down 7%, but steel stocks are down 50%. They believe this is overdone. Firm is Buying NUE, STLD, and X, but see upside to all of steel stocks.

Why have I gotten more bullish on the names?

I think most of the hedge-fund panic selling is done here. We saw a relatively high volume bounce yesterday which to me is a big tell.

I suggest you use the early morning weakness as a buying oppy.


Hariram Maneri said...

Good call NC..Afterhours its has further risen to $155 after the increase in buyback announcement..

Peter said...

Thank you very much for your Great call.