Investors looking to strengthen their portfolios can do much worse than picking up holdings in choice commodity-based companies. We have chosen to consider some companies outside the oil, gas, gold and coal industries with Zacks senior equities analyst Paul Raman, CFA.
What's one of your top commodity-driven Buy recommendations at this time?
Potash Corp. of Saskatchewan (NYSE: POT - News) is the world's leading producer of potash and the world's largest fertilizer producer. The company has benefited from higher fertilizer application rates, higher crop plantings, increasing demand for biofuels and rising crop prices. Rising fertilizers prices, especially potash will expand POT's margin in the second half of 2008 and 2009.
Aren't costs rising for this company as well, however?
The company's manufacturing plants are located in low-cost areas and its financials are solid. Also, Potash Corporation enjoys significant cost advantage with regard to raw materials. All potash produced by the company is in Saskatchewan, where extensive potash deposits are found.
Moreover, the company has lower-cost nitrogen operations in Trinidad due to the long-term, lower-cost gas contracts with Natural Gas Company of Trinidad and Tobago Limited. Further, in response to the rising prices of potash products, the company is expanding and developing projects to raise annual operational capacity to capture a significant share of the growth in global demand.
How have you calculated the worth of POT shares?
Currently, the stock is trading at 10.6x our 2008 estimate of $13.23. We rate the stock a Buy with a target price of $200.00. This is 15.1x our 2008 estimate.
Potash announced that on September 5 it purchased 500,000 of its outstanding common shares following a private agreement between itself and a third-party. The company stated that the purchase brings the total number of shares purchased under its 15.82 million share repurchase program, to 15.15 million shares.
Where else do you see an attractive commodity-based stock?
Rising prices and strong demand are pushing Cleveland Cliffs' (NYSE: CLF - News) performance. Robust industrial growth in China and India has triggered demand for steel, resulting in higher demand for iron ore. The company's portfolio of established and recent iron ore and metallurgical coal assets positions it to capitalize on global industry dynamics in 2008 and beyond.
Moreover, the merger with Alpha will help Cliffs to meet the increasing global demand for coal, consolidate the supplier base, and generate substantial free cash flow. We also believe the strong commodity price regime should significantly boost revenues for Cliffs. As a result, we rate the shares a Buy with a target of $85.00.
Very interesting. Any other commodity plays worth noting?
United States Steel Corporation (NYSE: X - News) remains a leading steel manufacturer in the U.S. The company's near-term profitability is expected to be strong due to higher flat-rolled contract prices and relatively low costs due to backward integration. U.S. Steel also has strong cash flow. These factors lead us to rate the stock to a Buy with a six-month target price of $150.00. .zacks.com
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