Analyst upgrades and downgrades: Sinkhole brightens outlook for Potash

Share

Inside the Market's roundup of some of today's key analyst actions. This file will be updated during the trading day.

A sinkhole at a Russian mine has prompted Raymond James analyst Steve Hansen to upgrade Potash Corp. of Saskatchewan Inc. to an "outperform" rating on the belief the event will tighten supplies of the fertilizer at a critical pricing time.

The sinkhole was found near Uralkali's Solikamsk-2 potash mine in Russia's Perm region, which suspended work a day ago after a water inflow. It's not clear how seriously the mine, which accounts for a fifth of the company's capacity, would be affected, according to a Reuters report. A water inflow and resulting sinkhole eight years ago shut another one of Uralkali's mine in the same region permanently.

"While long-term global potash fundamentals remain challenged, we believe news of a major supply outage at Uralkali suggests the market is poised to tighten during a critical period of international contract negotiations, with a disproportionate share of the volume benefit likely to accrue to Western producers," Mr. Hansen wrote in a research note.

He thinks the current evidence suggests there will be an extended outage at Solikamsk-2, "and possibly worse."

Both Uralkali and Belaruskali of Belarus are running their operations near capacity right now. That means much of the volume shortfall will need to come from Western-based producers such as Potash Corp., who have ample slack capacity, Mr. Hansen said. "Specifically, in the event that URKA's capacity remains handicapped, we believe that POT could benefit to the tune of an incremental 500,000–1,200,000 in international sales volumes. We have modestly bumped our volume forecast accordingly."

He believes both Chinese and Indian contracts for potash sales may now be settled higher as a result of the supply disruption, so he raised his expected benchmark prices for 2015.

And Mr. Hansen sees another thing working in Potash Corp.'s favour. Both corn and soybean prices, albeit still at depressed levels, have staged a strong upturn in the past month (rising by 24 per cent and 14 per cent, respectively) on the back of difficult winter conditions in the US. "These rising prices should serve to incrementally support domestic nutrient demand," he said.

Mr. Hansen, who previously rated Potash Corp. "market perform," raised his price target to $40 (U.S.) from $38.50.

AltaCorp Capital Research analyst John Chu was more cautious in his assessment of the situation, reiterating a "sector perform" rating and $34 (Canadian) price target. "Until we receive more clarity on the severity of the inflow issues, and given POT's almost 5 per cent rally on Tuesday, we believe the stock is already pricing in POT gaining about 1 million tonnes in additional sales volumes. ... Of course, if the inflow issue is not that bad, we still do not expect POT to trade all the way back to previous levels as this will remain a potential catalyst for the sector going forward," he said in a note.

========

In preparation for the eventual rise of interest rates, Canadian dividend investors should adjust their exposure to income stocks to limit the risk of elevated valuations, Credit Suisse analyst Andrew Kuske said in a new report.

As investors have flocked to dividend-paying stocks as a substitute for fixed-income products with unimpressive yields, valuations have risen.

"The current low interest rate environment has resulted in valuation extremes in a historical context for certain yield-related entities," the report said.

As a result, investors should discern between "fixed income proxies that may be at the most risk in a rising rate environment versus stocks with attractively priced dividend growth potential," Mr. Kuske said.

Within Credit Suisse's Canadian coverage space, Mr. Kuske highlighted five stocks with dividend growth not yet fully priced into today's share prices.

Four of them warranted upgrades to "outperform" from "neutral," with the following increases to target prices: Brookfield Infrastructure Partners, to $46 (U.S.) from $42.00; Enbridge Inc., to $70 (Canadian) from $52.00; Fortis Inc., to $44 from $32.00; and TransCanada Corp., to $68 from $58.

The analyst also increased his target price on Emera Inc. to $44 from $40 and maintained an "outperform" rating. Credit Suisse also added TransCanada to its "global focus list" - which makes it one of the bank's top investment ideas.

========

Morgan Stanley downgraded BlackBerry Ltd. to "underweight" from "equal weight" with a $7 (U.S.) price target. Click here to read more about the downgrade.

========

Suncor Energy Inc.'s new capital budget adds to concerns that production growth will be limited over the next few years, Desjardins Securities analyst Justin Bouchard said.

On Tuesday, the company released its spending plans and operating guidance for 2015. While capital spending is expected to increase, the spending is focused on longer-term production gains, Mr. Bouchard said. The result is lower-than-expected short-term production targets.

"We highlight that Suncor has limited growth prospects until 2018," Mr. Bouchard said. "The bottom line is that we do not expect free cash flow to grow meaningfully over the next few years."

He lowered his target price on the stock to $39 (Canadian) from $41, and maintained a "hold" recommendation.

Meanwhile, BMO Nesbitt Burns analyst Randy Ollenberger was only mildly disappointed with Suncor's guidance, citing sufficient free cash flow to support dividend growth and share repurchases, a strong balance sheet and improving capital efficiency.

"We believe that the shares remain very attractively valued compared to those of its peers given the company's compelling investment attributes," Mr. Ollenberger said.

He maintained an "outperform" rating and a target price of $52.

========

Sears Canada Inc.'s competitors are moving in on its market like "predators circling wounded prey," says Desjardins Securities analyst Keith Howlett.

Sears reported a third-quarter 2014 loss of $19.4-million, better than Mr. Howlett's forecast of $32.5-million, but a further slide into negative territory from $7.3-million a year ago.

"Sears has posted negative EBITDA in all three quarters to date in fiscal year 2014," he says. "We are forecasting operating EBITDA of $16.3-million Canadian (on revenues of $1,034-million) in 4Q FY14, although attaining a positive number could potentially be derailed by aggressive competitive actions by Walmart Canada, Target Canada, Hudson's Bay, Canadian Tire, Home Depot, Bed Bath & Beyond, Shoppers Drug Mart or others. In our view, a host of predators are circling the wounded prey."

Mr. Howlett maintains his "hold" rating and lowered his price target to $12 (Canadian) from $15. The average price target is $13.50, according to Bloomberg data.

========

In other analyst actions:

Macquarie downgraded Iamgold to "underperform" from "neutral" with a price target of $3.25 (Canadian).

CIBC World Markets downgraded Sandstorm Gold to "sector underperformer" from "sector performer" and cut its price target to $3 (Canadian) from $5.

Deutsche Bank initiated coverage on Pacific Rubiales Energy with a "sell" rating and $10.60 (Canadian) price target.

TD Securities initiated coverage on Chinook Energy with a "buy" rating and $2.25 (Canadian) price target.

BMO Nesbitt Burns raised its price target on Home Depot to $108 (U.S.) from $92 and maintained an "outperform" rating.

Merrill Lynch upgraded PetSmart to "neutral" from "underperform" and raised its price target to $80 (U.S.) from $55.

UBS downgraded Consolidated Edison to "sell" from "neutral" with an unchanged price target of $59 (U.S.).