Paul D'Amico, an analyst at TD Newcrest, is resuming coverage of Potash Corp. of Saskatchewan Inc. with a "hold" rating and a price target of $155 (U.S.), up from $100. A lot has changed since Mr. D'Amico suspended coverage on the stock in mid-August, due to restrictions.
Of course, there was the takeover offer from BHP Billiton Ltd. in August, which sent Potash Corp.'s share price surging more than 30 per cent in a matter of days. But fertilizer fundamentals have also improved, which is a big reason why Potash Corp. shares continue to trade well above BHP's offer of $130 a share.
"Although crop prices have declined recently, they are still materially higher versus mid-August levels," the analyst said in a note. "For instance, corn and soybean prices are 28 per cent and 16 per cent higher respectively since mid-August. This is largely due to substantially lower projected production, particularly for corn, which has significantly tightened the supply and demand picture."
Higher crop prices mean that farmers are less sensitive to various input costs, such as fertilizer, he argued. In other words, farmers are more capable of paying up. Indeed, fertilizer prices have kept up with crop prices: urea and phosphate prices have increased 28 per cent and 13 per cent, respectively, since mid-August.
Mr. D'Amico has raised his earnings forecast considerably. He now believes Potash Corp. in 2010 will produce earnings of $5.87 a share, up from an earlier estimate of $5.42. For 2011, he raised his earnings estimate to $8.92 a share, up from $7.35.
So why the "hold" recommendation? Potash Corp. trades at a premium to its peers, at 10.9-times 2012 estimated earnings before interest, taxes and depreciation. The premium is justified because of Potash Corp.'s leadership position within the fertilizer market - but keep in mind that there is no longer a takeover premium attached to the stock.
"At the current share price, Potash Corp.'s valuation looks fair to us," Mr. D'Amico said.