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Mosaic's (MOS) potash segment is facing headwinds from the decline in its global sales. These headwinds are expected to continue due to aggressive price cut requests from India and China. However, the major revenue contributing segment, phosphate, is expected to grow with a joint venture between Mosaic and two other Saudi Arabian companies.

MOS Chart

MOS data by YCharts

Besides growth in its phosphate segment, Mosaic's stock valuation also supports its growth potential. As per the chart shown above, Mosaic's stock shrank to $41.09 at the end of July, due to the BPC cartel breakup, which led to a decline in potash prices globally. Mosaic's stock is currently trading at $45.38, which is a decline of around 15.7% from its value a year ago. Going forward, we expect that with its strong fundamentals and valuation, Mosaic's stock will incline.

Sow phosphate to yield revenue

Mosaic is one of the largest producers of potash globally. In the second quarter of calendar year 2013, potash accounted for 37% of the company's total revenue, out of which 50% was contributed by its international segment. The major importers in the international segment are China and India. On October 7, 2013, Mosaic lowered its guidance for global potash shipments on account of weaker demand for potash from India. The decline of Indian currency made importing of products expensive, which is the primary reason for weaker demand for potash. This led Mosaic to decline its outlook for global potash shipments from the earlier estimate of 55 million - 57 million tons to 54 million - 55 million tons for 2013.

Going forward, we think that headwinds due to the decline in global potash sales will continue for the next year due to China and India. After the collapse of BPC, which we discussed in our previous article on Potash Corp. (POT), the prices of potash have declined. In such a scenario, China and India are asking for aggressive price cuts for importing potash to take advantage of the declining potash price. China seeks to pay less than $300 per ton for new contracts of importing potash for the second half of this year and next year. This price is significantly lower than the price of $400 per ton in the first half of this year. Indian buyers have already secured a discount of 12% on the prices of importing potash. The declining potash price may further impact the global sales of Mosaic's potash.

However, the whole story isn't gloomy. The major revenue contributing segment of Mosaic is phosphate, which is a growth opportunity for the company. To enhance its phosphate segment, the company entered a joint venture with two Saudi Arabian companies, Ma'aden and Sabic, in August 2013. The three companies will build a $7 billion phosphate plant in Saudi Arabia. Mosaic has a 25% stake in the plant and is expected to contribute to the design, construction, and operations. Mosaic is expected to invest around $1 billion under this joint venture, which is a notable portion of its total revenue, substantiating the significance of this plant.

With this joint venture, Mosaic expects to enhance its potash production globally. Under its international phosphate segment, Mosaic produced 3.12 million tons of phosphate in its fiscal year 2013. The new facility in Saudi Arabia is expected to produce 3.5 million tons per year of phosphate. Assuming that 25% of this production benefits Mosaic, as it has one-fourth stake in the joint venture, then we expect this joint venture to add around 0.87 million tons to Mosaic's annual international production of phosphate. This growth of production is a significant growth of 27.8% in the international segment. As this joint venture is expected to benefit the major 'phosphate' segment of Mosaic, we expect it to be a noteworthy revenue generation opportunity for Mosaic.

Canpotex partner

Mosaic is a member of Canpotex, which is world's largest potash exporting and marketing firm, and Agrium (AGU) is another member of Canpotex. Agrium's stock share price also plummeted following the announcement of BPC's breakage. However, Agrium expects long-term growth from acquisition of Viterra Inc.'s retail assets, a Canada based agriculture firm. On October 1, 2013, Agrium completed the acquisition of 90% of Viterra's retail stores in Canada and all of Viterra's stores in Australia for $289 million.

The acquisition is quite significant to Agrium, and according to Agrium's CEO Mike Wilson, "Viterra's assets are an excellent strategic fit for Agrium and we are pleased to have finalized this highly accretive acquisition".

This is a long-term growth opportunity; the synergies from the acquisition are expected to be between $14.41 million - $19.29 million, to be realized by 2015. This acquisition boosted investors' confidence, which increased its stock price upon completion of the acquisition.

Furthermore, on September 23, 2013, Agrium announced to pay quarterly dividend of $0.75 per share on October 17, 2013. Its past five years dividend yield range is 0.11% - 3.6%, with an average of 0.46%, and the company's current dividend yield is 3.6%. These factors present Agrium as an attractive investment opportunity.

Valuation

In terms of market capitalization, Mosaic's nearest rival in the agriculture chemical industry is Potash Corp. The trailing price to earnings, or PE, ratio of Mosaic is 10.37, lower than Potash Corp.'s 12.48 and the industry's PE of 15.3. The price to earnings growth, or PEG, ratio of Mosaic is 1.30, also lower than the PEG ratio of Potash Corp., which is 4.07. Other valuation parameters show a similar tale. Mosaic's price to sales, or P/S, ratio is 1.96, compared to Potash Corp.'s 3.47 P/S. Price to book, or P/B, ratio of Mosaic is 1.45 and that of Potash Corp. is 2.70. Additionally, Mosaic's P/B is lower than the industry's P/B of 3.7. All these valuation parameters indicate that Mosaic's stock is currently undervalued.

Conclusion

Mosaic's stock valuation makes its stock attractive. Its growth in the phosphate segment also supports its attraction. Mosaic's joint venture in Saudi Arabia supports growth in its phosphate segment. Mosaic's dividend yield also supports its growth momentum. Its past five years' dividend yield range is 0.22% - 3.86%, with an average of 1.24%. Mosaic's current dividend yield is 2.18%, significantly higher than the average value. Owing to strong fundamentals and valuation, we suggest investors consider this stock as a growth investment opportunity and buy it for safe returns.

Source: Mosaic: Still A Buy?

Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.