If you were waiting for a big pullback to buy into Methanex Corp., one of the best growth stories on the TSX, now's the time.
After its share price doubled last year – then added almost 30 per cent more to start 2014 – the chemical company's stock has dropped by 17 per cent in the past two months.
"We encourage investors to 'sharpen their pencils' amidst current volatility, lest they miss any opportune entry points that might surface," Raymond James analyst Steve Hansen said in a recent note.
With the stock wounded by a recent earnings miss, this is one of those entry points, said Barry Schwartz, chief investment officer at Baskin Financial Services, which has owned the stock since 2001.
Long an overlooked pure-play methanol producer, the Vancouver-based company became impossible to ignore last year as a number of favourable trends aligned.
Methanex is a bit of an unusual stock in that it benefits from both high oil prices and low natural gas prices, a combination that has mostly held over the past couple of years.
Methanol has many applications – it's used in the production of paint, plywood, sealants, synthetic fibres, windshield washer fluid and chemicals such as formaldehyde. It's also used as an alternative or additive to gasoline, hence the close relationship with oil prices.
As such, long-term demand for methanol is a pretty safe bet, and Methanex is the world's largest producer and distributor of the chemical.
Meanwhile, natural gas is the company's greatest input cost, so the supply glut brought on by the fracking boom helped lower the company's costs considerably.
Markets eventually caught on to Methanex. "For many years, it was worth so much more than what the stock price was telling you," Mr. Schwartz said.
But the company's run was interrupted. New Asian production put heavy pressure on methanol prices, with the Chinese spot price falling by 38 per cent between December and April, while the U.S. Gulf Coast price for the chemical fell by 22 per cent over that same period.
"A methanol price correction is finally upon us," Cowen and Co. analyst Charles Neivert said in a March note, as Methanex shares fell to the $65 (U.S.) range on the Nasdaq exchange. "We view this as a good entry point to Methanex shares, as we believe long-term methanol fundamentals are still intact."
Then last week, the company badly missed analyst expectations for first-quarter earnings, posting earnings per share of $1.65 compared with an average estimate of $1.90. Part of the blame was placed on falling prices. The stock declined once again, this time to the $60 range.
Mr. Hansen downgraded the stock to "market perform" from "outperform" and reduced his price target to $75 from $85. But, he noted, "our long-term view of Methanex's earnings growth … and leverage to methanol market fundamentals is unwaveringly positive."
The analysts covering the stock are evenly split between "buy" and "hold" recommendations, at an average target price of $71.20, representing an 18-per-cent premium on Thursday's closing price of $60.81.
One glaring dissenting opinion is that of CIBC World Markets analyst Jacob Bout, whose target price of $46 is 35 per cent below consensus. "We expect methanol prices to remain under pressure globally," Mr. Bout said in a recent note.
Others see signs that the commodity has bottomed. "We believe the longer term methanol supply/demand fundamentals are intact as demand for newer applications grows rapidly and capacity additions are relatively sparse over the next two to three years," said Cowan and Co.'s Mr. Neivert, who has an "outperform" rating and a $78 price target on the stock.
"Thoughtful long-term investors should see value," Mr. Schwartz said. "New management has figured out they have a lot of options to create value."
In 2012, the company began relocating its Chilean production facilities to Louisiana to take advantage of the long-term, low-cost supply of natural gas there. The first new plant is expected to start up later this year, the second in early 2016.
"Once we get through finishing these two plants in Louisiana, they're going to have billions in free cash they won't know what to do with. No one's talking about that story," Mr. Schwartz said.