2018-01-16 13:40:45 | CF Industries, Mosaic slide as analyst remains cautious on fertilizer marketIn a research note to investors, Credit Suisse analyst Christopher Parkinson reiterated his cautious view on the agricultural sector, saying he believes key global demand drivers show little to no evidence of year-over-year improvement. Furthermore, Parkinson argued that "hope is still a dangerous thing in 2018" and the agricultural cycle rebound play is "fairly dangerous." CONCERNS REMAIN: This morning, Credit Suisse's Parkinson told investors that as "Ag Euphoria" is once again in full swing in 2018, he reiterates his cautious view on the sector. The analyst argued that key global demand drivers show little to no evidence of year-over-year improvement, likely resulting in yet another season of lackluster performance for seed, agricultural chemical and fertilizer markets. Further, Parkinson stressed that fertilizer markets will remain structurally over-supplied. Buy-side expectations also appear lofty, warranting a "significant degree of near-term caution," he contended. Additionally, the analyst pointed out that adverse changes to the North American Free Trade Agreement also pose a key risk as Mexico remains a key importer of U.S. agricultural goods and has alternative suppliers from South America. While investors are playing seasonality/Chinese environmental reforms, Parkinson stressed "hope is still a dangerous thing in 2018." The analyst believes structural changes are being ignored, rendering the agricultural cycle rebound play "fairly dangerous." He also sees a "significant" degree of new supply previously planned to hit in 2017 which will now arrive this year. Overall, the analyst told investors he believes fertilizers markets will remain supply driven in 2018, driving volatile pricing and keeping profitability "lower for longer." FMC REMAINS TOP PICK: Credit Suisse's Parkinson also noted that nitrogen markets are set for another turbulent year in 2018, but CF Industries (CF) should be well positioned to manage the volatility. In his view, a supply overhang awaits following delayed capacity expansions in 2017 and an uncertain demand outlook in 2018, which sums to a difficult supply/demand and pricing environment ahead. Nonetheless, Parkinson believes that CF's cost-advantaged position should see the business generate solid cash margins despite pricing volatility, while U.S. tax reform should be a benefit to earnings. The analyst raised his price target for CF to $40 from $37, while reiterating a Neutral rating on the shares. Also keeping a Neutral rating on Nutrien (NTR), Parkinson argued that he continues to see potash headwinds mounting in the second half of 2018. More bearish on Mosaic (MOS), the analyst argued that the company is set to face a challenging 2018, which will be a critical year for management. Noting that phosphate prices and margins are likely to disappoint, he reiterated an Underperform on Mosaic's shares and raised his price target on the stock to $20 from $18. His top pick in the sector continues to be FMC (FMC) as he believes the business is well positioned to outpace agricultural market growth, while lithium dynamics remain favorable. Additionally, Parkinson sees greater opportunity for revenue synergies in the agricultural business, especially in India, as well as recent strength in lithium pricing. The analyst raised his price target for FMC to $111 from $102, while reiterating an Outperform rating on the name. WHAT'S NOTABLE: Over the weekend, Hedgeye said it sees over 50% downside risk in shares of CF Industries, according to Bloomberg. The firm thinks lower nitrogen imports are not a sign of an improving market, the report added. PRICE ACTION: In afternoon trading, shares of CF and Mosaic have dropped almost 5% apiece, to $41.39 and $25.89, respectively, while FMC stock has slipped about 2% to $96. Also lower are Nutrien and CVR Partners (UAN), which dropped about 1% each to $53.13 and $3.95, respectively. | |
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