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Inside the Market

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Potash Corp.’s head office in Saskatoon. The U.S. Securities and Exchange Commission has charged a former Banco Santander SA executive and a former Spanish judge with insider trading over a proposed takeover of Potash Corp of Saskatchewan Inc. on which the Spanish bank had given investment banking advice. (DAVID STOBBE/REUTERS)
Potash Corp.’s head office in Saskatoon. The U.S. Securities and Exchange Commission has charged a former Banco Santander SA executive and a former Spanish judge with insider trading over a proposed takeover of Potash Corp of Saskatchewan Inc. on which the Spanish bank had given investment banking advice. (DAVID STOBBE/REUTERS)

Stay clear of beaten-down potash stocks, HSBC warns in downgrade Add to ...

Inside the Market’s roundup of some of today’s key analyst actions. This post will be updated with more analyst commentary during the trading day.

HSBC today downgraded its ratings on much of the potash industry, now recommending investors stay clear of the sector given the uncertainties arising from the breakup of the world's largest potash oligopoly.

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Russia’s Uralkali said late last month it is walking away from its Belarus Potash Company (BPC) joint venture with partner Belaruskali in order to sell potash on its own to hungry markets in China and India. The move could have a dramatic impact on the industry’s supply-demand picture and spur a global potash price war.  

"Despite the recent share price falls of potash producers, on the whole, we would not recommend building an overweight position in the sector," HSBC analysts, led by Yonah Weisz, said in a research note. "We take at face value Uralkali’s stated goal of ramping up production and cutting prices, to which Belaruskali will react with further price undercutting in order to gain share."

HSBC also believes that Canpotex, the Canadian potash exporting and marketing arm, will get dragged in to the new competitive landscape, as it will not wish to lose market share, and will likely match the actions of the former cartel partners.

"Altogether, the next 12 to 18 months may be characterized by a fair amount of competition in what was once an oligopolistic industry. There may be good reasons for Belaruskali and Uralkali not to choose this ruinous path of behaviour, but we would not consider such scenarios as a base case for investment at this stage," HSBC analysts said.

Further ahead, HSBC sees a recovery in the sector. Potash markets could tighten in 2015-16 as demand grows while new capacity investments stall. "This could lead to higher prices regardless of the industry structure," it said.

Targets:

Agrium Inc. was downgraded to a "neutral" rating from "overweight" with a reduced price target of $95 (U.S.) from $117. 

Potash Corp. of Saskatchewan was downgraded to "underweight" from "overweight" with a reduced price target of $22.50 from $48.

Mosaic Co. was cut to "underweight" from "neutral" with a reduced target of $33 (U.S.), down from $66.

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BMO Nesbitt Burns analyst Keith Bachman is “tilting more positive” in his outlook for Hewlett-Packard Co., which will release its latest quarterly results after today’s market close.

He thinks HP can report positive earnings per share growth in fiscal year 2014 even with declining revenues, and believes free cash flow levels should improve modestly.

“For the current quarter, we think HP can deliver revenues modestly above consensus and EPS of 88 cents versus consensus of 86 cents,“ he said after conducting  an analysis of the company's restructuring and the potential impact on profits.

Target: Mr. Bachman raised his price target to $30 from $24 and maintained a “market perform” rating. The average price target among analysts is $25.61, according to Bloomberg data.

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Investors may want to put a lid on some of their enthusiasm for Tupperware Brands Corp.

BMO Nesbitt Burns analyst Connie Maneaty downgraded the stock to “market perform” from “outperform,” concerned about the impact of a weakening economy in Indonesia.

Tupperware shares have risen more than 30 per cent this year, and given that it now trades at 15 times forward consensus earnings estimates, further near-term upside is limited, Ms. Maneaty said.

“TUP operates in over 100 countries, and the breadth of its portfolio cushions the pressure from any one country. However, the top seven markets account for about 50 per cent of sales, and we’re not sure TUP’s valuation reflects risk in Indonesia (about 8 per cent of sales) where the price of gas has increased 44 per cent and the rupiah is down 9 per cent year to date and 4 per cent since TUP reported second-quarter earnings on July 24 as the government tries to address the fiscal issues there. In addition, in other top markets, sales seem robust only in Brazil and China,” she said.

Target: Ms. Maneaty maintained a $91 (U.S.) price target. The average target is $88.57.

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Bank of America Corp. has made some good progress reining in expenses this year, which has Credit Suisse analyst Moshe Orenbuch revising his earning per share estimate for the bank.

With mortgage delinquencies tracking better than expected in the first half of 2013, the bank’s expenses will be driven further down in the second half of the year and into 2014, he said

“Leverage to reduce costs further will come from the mortgage business - and could come faster than expectations,” he said.

But while the bank has done a good job of saving money, making it is another story in Mr. Orenbuch’s view.

“While we see some earnings flexibility over the near term with expense reductions, we wait to see more meaningful revenue growth before we get more positive,” said Mr. Orenbuch

Target: Mr. Orenbuch maintained his “neutral” rating for the bank but raised his price target to $14 (U.S.) from $13. The average price target is $15.38.

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UBS analyst Steven Milunovich has “rejiggered” his conservative price assumptions for Apple Inc.'s new midrange iPhone 5C.

He predicts gross margins on the phone will be 38 per cent, up from 32 per cent. That should help give a bump to Apple’s earnings.

He also expects the company to strike a deal with China Mobile before year end, which Mr. Milunovich predicts could lead to 17 million iPhones sales in 2014.

“Each incremental 1 million units would add about 20 cents (U.S) per share to our estimate” he said.

Mr. Milunovich also doesn’t think that pressure from billionaire investor Carl Icahn will cause Apple to increase its buyback plan in the near term, although he noted that the company easily could fund a 50 per cent - or $30-billion -- increase in its three-year plan.

Target: Mr. Milunovich raised his price target for Apple to $560 (U.S.) from $500. The average price target is $521.11.

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Sears Canada Inc. reported a 2 per cent drop in sales of accessories and apparel in the second quarter, but Desjardins Securities analyst Keith Howlett said he considered the results "good" in light of the increased level of competition from Target Corp.

He is maintaining a "hold" rating on its shares for now. "We continue to be of the view that while Sears Canada owns a base of solid assets, a turn in operating results is not yet in evidence," he said.

Target: Mr. Howlett reiterated an $11 price target. The average target is $9.75.

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For more analyst actions, breaking investing news and analysis, follow Darcy Keith on Twitter at @eyeonequities

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