UBS raised Buy rated POT on March 15 to +$5 price target of $21
"Valuation multiples have increased for Chems & an Ag bottom may be in sight
We are raising our PT to $21. Despite the ongoing challenges in the ag complex and fertilizer market, the materials ETF (XLB) has risen ~10% over the past month, reflecting a rethinking of risk and valuation multiples, in our view. This also corresponds with the flare-up in oil prices, which is significant to materials & commodity-related stocks and commodity-related country currencies have also responded. We also believe that crop prices are near bottom. Despite expectations of higher planted acreage, corn prices have remained relatively stable. In our view, there is currently more upside risk than downside risk to corn prices and note that a slight decrease in record yields (weather related) could result in a significant decrease in inventories.
Managing potash supply is key
Despite all the challenges in the potash market since the collapse of the BPC cartel in July 2013, POT continues to maintain a leadership role in managing supply. The company recently shut down its Picadilly mine (1.8M tons) and will curtail production at Allan (lost volume of 400k tons) in order to balance the market, which clearly has been under pressure. We expect ongoing supply management to position the industry well until the eventual demand recovery.
Near-term focus is on spring planting season and China
Fertilizer prices have declined over the past year due to oversupply conditions and lackluster demand. Spot potash prices in Brazil are currently ~$240/ton (from $360 in 1Q15), and we suspect the next contract prices for China and India are likely to settle around that level (current contract prices in China and India are $315 and $332, respectively). Prices in the US are down but should firm up modestly as we approach the spring planting season. Nevertheless, until Chinese/Indian 2016/2017 contracts are completed over the next several months