Markets
CF

Street Analysts Underestimate Fertilizers' Earning Power

Chris Damas submits:

I was struck by how far off Street analyst estimates for Potash Corp's ( POT ) third quarter were:

Potash Corp reported diluted EPS of $1.32 or 13.8% more than average Street $1.16 estimate.

Potash Corp reported revenues of $1.575 billion or 21% more than average Street estimate $1.3.

Although the stock sold off about $5 on the NYSE yesterday due to the growing suspicion that the Canadian government would rule against the BHP ( BHP ) bid, Potash Corp's stock is bouncing back today (Friday).

Typically, Street analysts take a day or two to update their financial models and report on the earnings release and subsequent conference call, to their institutional clients. They need to update their financial models, incorporate subtext offered during the Q&A into their viewpoint, and carefully make a clear case for a change in target price and/or recommendation change before simultaneous dissemination to clients. This all takes time.

It always pays to wait 2-3 days after an earnings release to get the real institutional reaction to be reflected in the stock price. Never jump in (or out) right away unless you are sure an upgrade (or downgrade) is certain.

Generally, this is rarely is the case. You have to "Read the Tape" to figure out what is coming down the pike. That's where we come in.

Here was the fertilizer stock action on the NYSE a half an hour ago:

Agrium Inc. ( AGU ) $88.53 up $2.44 (+2.8%) on 1.3 million

CF Industries ( CF ) $124.94 up $5.80 (+4.9%) on 2 million

Mosaic ( MOS ) $72.71 up $2.32 (+3.3%) on 2.8 million

Potash Corp $145.50 up $2.97 (+2.1%) on 8.4 million

The tape is definitely saying "Full Steam Ahead" on Fertilizer stocks. And the fundamentals back this up.

We carefully analysed domestic potash, nitrogen and DAP fertilizer margins this month, and came to the conclusion Street estimates would be outpaced by actual earnings.

We are calling for Agrium to report $2.4 billion in Q3 revenues and $2.25-$2.50 in CFPS when it is released on November 3. These estimates are higher than the Street average estimate of $2.1 billion revenues and 87 cents EPS made before the Potash Corp earnings release.

Our target price near-term for Agrium is $94 US.

We are calling for CF Industries to report $1.2 billion in Q3 revenues and $3.75-$4.25 in CFPS when it is released on November 4. These estimates are higher than the Street average estimate of $980 million revenues and $1.41 EPS made before the Potash Corp earnings release.

Our target price near-term for CF Industries is $140 US.

We also have a highly bullish estimate of $23.25 CFPS for CF Industries for 2011, and a $186 price target for 2011, assuming a near normal corn and wheat crop year in the US Midwest.

Potash Corp CEO Bill Doyle's bullish comments on the Q3 conference call, and apparent certainty on the growing demand for fertilizer and large future profits for Potash Corp were in stark contrast to his tentative remarks made at the beginning of the year.

Potash Corp's guidance for 2010 EPS at the beginning of the year was $4-5. It is now $5.75-$6.00 and the Company guided analysts to expect EPS of $8.00-$8.75 in 2011.

The stock is currently trading at roughly 16.6 on the high end and 18 times the low end of the EPS range. Is this cheap or dear? Even if we knew the guidence was likely to be accurate, the stock is trading on other than earnings expectations.

Mr. Doyle is now comparing his stock to the fertilizer peer group stock performance since August and estimating what the unaffected POT stock price would be - as you might guess, much higher than the current BHP Billiton $130 US offer.

We did this comparative analysis over a month ago and came to the conclusion the stock would not fall much even if a takeover offer for the company were not permitted or would otherwise not come to fruition. See here .

What is the reality and how should you trade these stocks, if you are in the lucky position of being long fertilizer stocks?

We are hesitant to give a trading strategy for Potash Corp due to the high risks of handicapping the odds of Minister Tony Clement approving or denying the deal, a decision expected on November 3, the same day we'll see the new US Congress voted in the day before and an FOMC decision with commentary on QE2.

This will be followed by the October US Non-Farm Payrolls report on November 5, with the emphasis on "Non-Farm". Another USDA crop production report, always a wild card, is to be dealt on November 9, which could move fertilizer.

On Mosaic, the Company received the ability to mine 200 acres of the 10,000 plus Hardee County phosphate mine tract pending multiple court decisions on various aspects of the legal challenge to its Clean Water dredge and fill permit. Again, hard to gauge how this will play out.

Suffice to say, Street analysts are busy upgrading their EPS targets and target prices for US fertilizer stocks. It would be wise to stay in these stocks until you see the end of the earnings season, which should surprise to the upside.

Disclosure: None

See also Copper Touches New Record High on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

CF BHP MOS

Other Topics

Commodities