Why the Incitec Pivot Ltd (ASX: IPL) share price is the best performer on the S&P/ASX 200

The Melbourne Cup hasn’t started but there’s already a winner on the market with the Incitec Pivot Ltd (ASX: IPL) share price racing higher today to become the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.

Shares in the chemical company surged 4.9% to $4.22 in lunch time trade with Bellamy’s Australia Ltd’s (ASX: BAL) share price, Syrah Resources Ltd’s (ASX: SYR) share price and Western Areas Ltd‘s (ASX: WSA) share price following close behind.

Incitec has taken pole position after Credit Suisse upgraded the stock to “outperform” from “neutral” ahead of the company’s full year results next Tuesday.

The broker believes Incitec can deliver a pleasant earnings surprise as the market isn’t fully appreciating rising fertilizer prices and growing explosives demand in eastern Australia.

The Iranian sanctions, Chinese reforms and project delays are factors behind a significantly tightening supply environment and the broker has upgraded its fertilizer price forecasts for the third and fourth quarter of 2018.

Problems at Orica Ltd’s (ASX: ORI) Burrup plant that will delay the plant returning to full production until 2020 is also good news for Incitec.

“The market may be underestimating the impact of Phosphate Hill returning to full production in FY19 –we estimate an incremental A$30mn to EBIT [earnings before interest and tax] and a reduction in gas cost from 1 January adds A$20mn to EBIT in FY19 (A$9mn in FY20),” said the broker.

“With IPL intent on maintaining its Bowen Basin dominance, the next major capital project appears likely to be an expansion of ammonia capacity at Moranbah to support additional AN production.”

But even with this investment, Credit Suisse believes the company has the capacity to continue returning capital to shareholders over the medium term.

The broker has lifted its price target on Incitec to $4.33 from $4.02. Given today’s sharp rally, there doesn’t seem to be much more upside to the stock.

This makes me think that Nufarm Limited (ASX: NUF) may be a more rewarding option for those looking for stocks exposed to agriculture.

Nufarm’s share price is down 30% since the start of 2018 as its earnings took a hit from the drought in New South Wales and parts of Queensland.

In contrast, the Incitec share price is up 9% and Orica’s share price is only 1% in the red.

This leaves Nufarm plenty of room to play catch up, particularly given its medium-term earnings outlook from its European expansion and the introduction of its omega-3 enriched canola product.

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Motley Fool contributor Brendon Lau owns shares of Nufarm Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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