It's Time to Buy These Fertilizer Stocks - Citi (POT) (MOS)

May 31, 2011 12:08 PM EDT
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Price: $18.91 --0%

Rating Summary:
    15 Buy, 16 Hold, 8 Sell

Rating Trend: Up Up

Today's Overall Ratings:
    Up: 0 | Down: 0 | New: 0
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Fertilizer stocks Potash Corp. of Saskatchewan, Inc. (NYSE: POT) and Mosaic Co. (NYSE: MOS) are modestly higher Tuesday after Citi upgraded the pair due to the recent pullback and continued strong fundamentals.

Citi upgraded both stocks from Hold to Buy while raising the price target on Potash Corp from $61 to $67 and Mosaic from $84 to $85. The firm also raised its price target on Agrium Inc. (NYSE: AGU) from $94 to $96, but still rates that stock a Hold. Estimates were also raised on all three for next year and this year for Mosaic.

Analyst P.J. Juvekar noted that since Citi downgraded shares in early March, valuation has become more attractive and Ag fundamentals have strengthened further. Confidence that potash and DAP will remain tight has also grown.

Juvekar said there are three factors for today's upgrade: 1) tariffs and electricity shortages in China; 2) the impact of delayed plantings in the US; and 3) improved clarity regarding the absorption of new supply.

Commenting on tariffs and electricity shortages in China, the analyst notes Chinese authorities have altered the tax structure this year to further discourage exports and less DAP/MAP could hit the market. Fewer exports due to tariffs and electricity shortages could keep the market tight, benefiting MOS and POT, he noted.

Delayed U.S. planting due to wet and cold conditions, and up to 2 million fewer corn acres being planted should support commodity prices, Juvekar also said.

While new potash capacity is coming online in the next few years, the firm doesn't see a near-term worry. Also, Canadian producers have a strong track record of managing production to support pricing and are unlikely to disrupt the market. The merger of of Russian potash producers Uralkali and Silvinit could result in greater discipline, the firm noted. The Ma'aden project in Saudi Arabia (4% of global capacity) is starting this year, but the ramp up could take 18-24 months.

Upcoming catalyst are the outcome of negotiations for potash shipments to India and for 2nd-half deliveries to China.

Shares of Potash Corp. are up 1.6% to $56.90, while Mosaic is up 0.3% to $70.25.

To see Citi's recent performance rating Mosaic and PotashCorp visit's Ratings Insider.

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