Investing

Hot Stock: Methanex

Methanol prices are rising.

In Canada, the commodities that typically garner the most attention are oil and natural gas. But here’s another one you should pay attention to: methanol. This chemical is used to create a host of products, from shampoo and carpeting to paints and plastics. It’s also used as fuel for vehicles, among other things. Methanol’s price has been steadily climbing over the last several years—it’s up about 15.6% to $1.55 a gallon since January 2012 and it’s jumped more than 121% since January 2009.

The world’s largest supplier of methanol is Methanex (TSX: MX), a Canadian company headquartered in Vancouver. Not surprisingly, as the commodity’s price has risen, so has this company’s stock price—it’s up 35% year-to-date and 62% over the last five years. A number of analysts, though, think the stock price can climb even further and not just because of ever-increasing methanol prices.

On April 25, Alexandra Syrnyk, an analyst with BMO Nesbitt Burns, upgraded the stock from neutral to outperform. The catalyst for the ratings change was strong Q1 2013 results. Syrnyk was pleased to see that adjusted EBITDA of $149 million was 3% higher than analyst estimates (though it was about 3% lower than what she predicted) and it also hiked its dividend by 8%—it pays a 1.9% yield.

She was also excited by Methanex’s announcement that it was moving a plant—its second one—from Chile to Louisiana. Due to supply restrictions, it hasn’t been able to run its southern Chilean plants at full capacity. The move should help increase production. “The confirmation of a second Chile-to-Geismar (Louisiana) plant relocation, along with commentary suggesting that the first move… (is) on schedule and budget have increased our confidence in Methanex’s growth profile,” she wrote in a recent report.

Ben Isaacson, an analyst with Scotia Capital, is also happy about the plant’s relocation. This move sets the path to $8 per share of annual free cash flow, he says, which he thinks can be achieved in 2014. That’s up from $4.68 of free cash flow per share in 2012.

He also points out that the company is planning to spend about $1.5 billion between 2013 and 2015 on growth-related projects, which includes the plant relocations. However, he doesn’t expect the company to raise money to fund this growth. As of March 31, it had about $700 million in cash and an untapped $400 million credit facility. Operations are also expected to generate about $650 million in free cash over the next two years. “We believe Methanex will be able to fund its growth without having to raise additional equity,” he wrote in an April 25 report.

Thanks to all of this, plus a possible rise in methanol process this spring, Issacson has increased his Q2 earnings per share target by 22% to $0.81. He has a $52 price target on the stock, while Syrnyk thinks it will hit $48. It’s trading at $43 now.

If you’re looking for something different to add to your commodity holdings, especially in today’s falling oil price environment, then take a look at this solid Canadian stock.

For more investing insights, follow Bryan on Twitter @bborzyko.