Methanex Upgraded to Buy

The world’s largest producer and marketer of methanol, Methanex Corp. (MEOH - Analyst Report), is benefiting from improving fundamentals, lower costs and declining average gas costs. New applications for methanol imply strong future growth. It has a strong cash flow that drives dividend increases and stock buybacks. We believe that a revaluation of the stock is warranted and feel the stock should trade at 11.5x 2008 earnings. This implies a $30 target and a Buy rating.

New markets for methanol such as dimethyl ether (DME) and biodiesel offer the potential for growth. Demand growth of 4% should exceed supply growth of 3%. DME could push potential demand growth as high as 10%. Supply growth will be absorbed by demand growth in China. Operating rates are 84% globally now. The company is benefiting from declining average gas costs as well. Each $1/Mcf decline in natural gas is worth $0.80 in EPS.

The methanol industry is a concentrated market, with Methanex being the largest and most powerful producer, controlling nearly 19% of the market. A $1.3M ton expansion in Egypt that will be on stream in 2010 will only enhance this position.

The core production hubs for Methanex in Chile and Trinidad have an annual production capacity of 5.8 million tons and represent over 90% of current annual production capacity. The company also produces 1.4 million tons per year of methanol in New Zealand and is a reseller for other manufacturers, which can be up to 20% of total volume.

Read the full analyst report on MEOH