Atlantic Equities analyst Colin Isaac is warning investors not to get too excited about a recent dip in the stock prices of big agricultural names. Isaac sees “further downside risks into 2012.”
“Into 2012, although another poor harvest and continued supply constraints are a real possibility, higher acres, improving yields and lower prices are equally likely. Moreover as demand is cyclical we see growing risk that corn inventories recover. A bear case scenario of higher acres, better yields and lower demand generates a stocks-to-use ratio of 16% and implies a sharp price correction. Dollar strength adds a further risk.”
Isaac thinks that current low price to earning multiples in the group are just a precursor to falling EPS estimates. He downgraded fertilizer stocks to Neutral from Overweight. Isaac likes Potash (POT), however, “given lower relative EPS risk and upside potential through both potash pricing and volumes,” and upgraded it to Overweight.
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