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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