Citi's Chemicals And Agriculture Pair Trade: Buy Mosaic, Hold Sherwin-Williams

In a preview of third-quarter earnings in the chemical and agriculture sector, Citigroup highlighted a pair trade in the sector. 

The sell-side firm recommended buying Mosaic Co MOS but moving to the sidelines on Sherwin-Williams Co SHW.

The Analyst

Analyst P.J. Juvekar upgraded Mosaic from Neutral to Buy with a price target lifted from $36 to $40. Sherwin-Williams was downgraded from Buy to Neutral with a price target cut from $492 to $435. 

Citi also removed Buy-rated DowDuPont Inc DWDP from its Focus List.

The Thesis

Ongoing raw material headwinds and slower growth in key markets such as China has tempered expectations in the chemicals sector, Juvekar said in a Wednesday note. (See the analyst's track record here.) 

The analyst reduced estimates as well as target multiples by up to 1 times EV/EBITDA.

Higher oil and ethane prices and slower demand would make it tough to take advantage of price increases, Juvekar said. 

Among the paint makers, Sherwin-Williams is unlikely to dodge raw material and end market woes outlined by peers PPG Industries, Inc. PPG and HB Fuller Co FUL, the analyst said. 

PPG recently warned of higher material costs and weak Chinese demand in addition to higher logistics expenses arising from higher crude oil prices and a stronger dollar.

Citi reduced its third-quarter as well as fiscal 2019 EPS estimates for Sherwin-Williams to $5.72 and $22, respectively, and slashed the price target by $57. 

On the other hand, Citi sees Mosaic as benefiting from improving phosphate fundamentals.

The Price Action

Sherwin-Williams shares have added about 1.8 percent year-to-date, while Mosaic has gained about 17 percent.

Related Links:

With Sale of Agricultural Business Pending, Citi Takes Neutral Stance On Platform Specialty Products

5 Agriculture Stocks That Could Withstand A Trade War With China