A very significant stock and sector upgrade has taken place on Friday morning that might not be getting the attention that it deserves. BGC Financial has stuck its neck out and decided to upgrade the potash and fertilizer sector after, this sector has been battered after the Russian cartel exit of Uralkali. This is on the heels of multiple downgrades and lowered expectations from many other research shops, and we would note that it is actually a partial reversal of a BGC downgrade from the end of July. This downward pressure in the past two weeks created chaos in the potash and fertilizer stocks. The downward move even caused billions of dollars worth of financial losses to agriculture investors.
BGC's analysts who made the call are Mark Gulley and Joseph Roche. The report on Potash Corp. of Saskatchewan (POT) said:
We continue to believe that there is too much at stake for the two parties in BPC to remain separate for long, as discussed below. Volatile pricing is not a new element of Russian potash marketing strategy. In 2008, BPC raised the potash price $250 per tonne.
Potash Corp. of Saskatchewan (POT) was raised to Buy from Hold with a $37 price target, implying upside in potential capital gains, enhanced by a 4.6% yield. The analyst team even increased earnings on less dire pricing assumptions to $2.44 from $2.36 per share in 2013 and to $2.51 from $2.26 per share in 2014, supported by the 7% to 8% share repurchase program. The research note points out that these new estimates are still far below a peak of $3.67 in earnings per share in 2008 and $3.51 per share in 2011.
Mosaic Co. (MOS) was raised to Buy from Hold with a $50 price target, implying 15% in potential capital gains, enhanced by a 2.3% dividend yield. Its shares have pulled back 19%. The team's 2014 earnings estimate was raised to $3.54 from $3.35 per share, and the 2015 estimate was raised to $3.75 from $3.65 per share, aided by the buyback as well. These estimates are still far below peak earnings of $4.42 per share as recently as 2012.
Intrepid Potash Inc. (IPI) is the smaller of the three companies by far, but its rating also was raised to Buy from Hold with a $16 price target. Its shares have corrected 34%, and the difference here is that BGC's analysts have lowered the earnings estimates ahead.
We would also point out that BGC's upgrade move is on the heels of the CEO comments on Thursday from Potash Corp. of Saskatchewan (POT). He said that the disruption likely will be temporary, as the North American consortium will not break up just because of the move in Russia.
Potash Corp. shares were higher in early Friday trading, but shares were down 1% at $40.43 in later morning trading, against a 52-week range of $28.55 to $44.82. Mosaic was also higher, but the shares were then down 0.2% at $43.40 in Friday morning trading, against a 52-week range of $39.75 to $64.65. Intrepid Potash shares were up 0.3% at $13.00 in late morning trading on Friday, against a 52-week range of $10.60 to $24.70.
If you want to see just how devastating the Uralkali news has been to the agricultural sector, just look at the Market Vectors Agribusiness ETF (MOO). Its shares were still down on Friday by 0.3% at $50.45, but its 52-week trading range is $49.26 to $56.55. Its top holdings are Syngenta, Monsanto, Potash Corp., ADM, Deere, Kubota, Mosaic, Agrium and Bunge.