A financial analyst who closely follows Viterra has slashed his target price for the company’s shares by 27 percent.
David Newman of National Bank Financial reduced the price to $11.75 from its previous level of $16.
A target price is based on formulas reflecting a company’s forecast earnings and is defined as the price at which the holder of a stock is hoping to sell that stock.
Newman issued his revised target price Oct. 24, the same day Viterra’s shares on the Toronto Stock Exchange dipped to a 52-week low of $5.47.
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In mid-June the stock was trading at slightly less than $15. The 52-week high is $15.19 on April 16.
In a commentary accompanying his revision, Newman said he was reducing his projected EBITDA (earnings before interest, taxes, depreciation and amortization) for 2007-08 to $492 million from $498 million and for 2008-09 to $420 million from $433 million.
That’s due in large part to a reduction in Viterra’s estimated earnings from fertilizer manufacturing.
He also decided to base the target price on a more traditional level of seven times EBITDA, down from nine times.
Analyst Orin Baranowsky of BMO Capital Markets said Oct. 24 he was leaving his target price for Viterra unchanged at $15.50, where it has been since mid-July.
He declined to say whether he was considering a change based on recent events in the market.
“It’s something we always keep an eye on,” he said.
Viterra’s stock is clearly undervalued relative to the company’s fundamental strengths and continued strong world demand for grain and other food products, he added.
Newman said Viterra’s share price was driven to unexpected heights in the past year as investors piled into the agricultural sector based on increasing demand from emerging markets and the ethanol and biodiesel industries.
“This sleepy and rather value-driven industry was turned on its head and became a momentum-driven industry,” he said, adding “saner views” are now prevailing.
At the same time as he reduced the target price, Newman said Viterra has been treated unfairly during the recent market collapse.
He said the company has been lumped in with fertilizer manufacturers and other commodity-driven players as the agricultural bubble deflated.
In reality, he said, Viterra’s business is mainly driven by revenues from grain handling and sales of farm inputs rather than commodity prices.
Baranowsky agreed, saying there is only an indirect relationship between commodity prices and Viterra’s financial performance.
“If the price of wheat doubles, it’s not as if their handling margin doubles,” he said.
However, if grain prices drop to low levels, farmers may hold off on deliveries, which would affect the company’s revenue stream.
Similarly, if grain prices are high and farmers are making more money, they will likely spend more on farm inputs, which would benefit Viterra’s bottom line.
“It’s an indirect link, but it’s all interrelated,” Baranowsky said.
