Goldman Sachs is adding Potash (NYSE:POT) to Conviction Buy list with $140 target retained. They are also upgrading shares of Mosaic (NYSE:MOS) to Buy (from Neutral) as they take advantage of a sharp sell off in the fertilizer space last week to get more bullish. Their view of a fundamental demand recovery in potash in 2010 remains unchanged, and they believe a near-worst-case scenario on 2010 potash pricing is now discounted in stocks. Goldman sees a very compelling risk/reward setup and encourage investors to buy shares of both POT and MOS before the market regains its confidence in the fertilizer outlook in 2010 and beyond.
What the market missed
Goldman believes that confusion and uncertainty dominated trading this past week and note that the market entirely ignored bullish comments from the same sources that drove the negative sentiment. The rumored $300/mt FOB Baltic China contract price is actually inline with the expected outcome range, albeit at the lower end, when adjusting for the appropriate freight costs. They believe much of the market misunderstood this data point as a delivered price to China. Other industry comments suggested an 80% increase in potash exports and rising 2H10 prices in Brazil.
Catalyst
With expectations lowered, they believe the conclusion of a China contract settlement will be a positive catalyst for both the global potash markets and potash-exposed stocks. The contract could be signed by year end, and theywould expect an early January settlement if it carries over into the New Year. Once signed, the firm believes other global importers will begin taking shipments to secure their 2010 potash needs. Given lean distribution system inventories, an increase in shipments will help clear producer inventory substantially more quickly than in the past.
Best buy ideas
POT is Goldman's favorite Buy based on the 2010 potash theme, but they also like MOS, which has significant phosphate exposure—a nutrient that, confirmed by very recent channel checks, has been strengthening. For MOS, they raise our 12-month, price target to $68 (from $64) based on 16X (from 15X) P/E forward EPS to be more aligned with peer valuations. They make no estimate changes, and note that they are slightly below 2011 consensus EPS in POT, but believe stocks will move ahead of revisions.
Notablecalls: POT is down over 12 pts over the last couple of trading days. I'm being told Cramer was all negative on the name on Friday (saying weakness would continue on Monday) which sets the name up for a short squeeze - POT style!
I'd like to see a slight pullback toward the $108 level before the name takes the shorties for a ride.
I'm not making a conviction call here but I think that's how it's going down this morning.
Just a heads up.
Btw, GSCO coverage on POT has been just terrible. Terrible!
What the market missed
Goldman believes that confusion and uncertainty dominated trading this past week and note that the market entirely ignored bullish comments from the same sources that drove the negative sentiment. The rumored $300/mt FOB Baltic China contract price is actually inline with the expected outcome range, albeit at the lower end, when adjusting for the appropriate freight costs. They believe much of the market misunderstood this data point as a delivered price to China. Other industry comments suggested an 80% increase in potash exports and rising 2H10 prices in Brazil.
Catalyst
With expectations lowered, they believe the conclusion of a China contract settlement will be a positive catalyst for both the global potash markets and potash-exposed stocks. The contract could be signed by year end, and theywould expect an early January settlement if it carries over into the New Year. Once signed, the firm believes other global importers will begin taking shipments to secure their 2010 potash needs. Given lean distribution system inventories, an increase in shipments will help clear producer inventory substantially more quickly than in the past.
Best buy ideas
POT is Goldman's favorite Buy based on the 2010 potash theme, but they also like MOS, which has significant phosphate exposure—a nutrient that, confirmed by very recent channel checks, has been strengthening. For MOS, they raise our 12-month, price target to $68 (from $64) based on 16X (from 15X) P/E forward EPS to be more aligned with peer valuations. They make no estimate changes, and note that they are slightly below 2011 consensus EPS in POT, but believe stocks will move ahead of revisions.
Notablecalls: POT is down over 12 pts over the last couple of trading days. I'm being told Cramer was all negative on the name on Friday (saying weakness would continue on Monday) which sets the name up for a short squeeze - POT style!
I'd like to see a slight pullback toward the $108 level before the name takes the shorties for a ride.
I'm not making a conviction call here but I think that's how it's going down this morning.
Just a heads up.
Btw, GSCO coverage on POT has been just terrible. Terrible!
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