Methanex Pressured from Chile

Methanex Corp. (MEOH - Analyst Report) is the world's largest producer and marketer of methanol. The Menlo Park, California-based company is benefiting from improving fundamentals and lower costs, along with declining average gas costs. It also has strong cash flow that drives dividend increases and stock buybacks. However, problems with the company's Chilean facilities force us to rate the stock a Hold.

The company is hard hit by elimination of natural gas supplies from seven Argentine suppliers as well as an increase in export duty for gas by the country to 100%. However, the company may have found a way out by seeking alternative sources of natural gas or by directly participating in exploration projects. It is now anticipating increasing quantities of Chilean gas and expects to spend about $100 million in capital over the next 3 years. About 62% of the natural gas for the Chilean facilities is currently sourced from suppliers in Argentina.

Methanex is currently valued at 6.8x our 2008 earnings of $2.44, which is at a sharp discount to the industry median of 10.3x. We believe that the stock should trade at 7.0x our 2008 earnings. This implies a price target of $17.

Read the full analyst report on MEOH