Seeking Alpha
Profile| Send Message|
( followers)  

Mosaic (MOS) is a specialty chemicals company offering products such as premium crop nutrients, potash, phosphates and feed ingredients. Mosaic is a Fortune 500 company based in the US and has a market capitalization of $24 billion.

Business overview

Mosaic produces about 10.3 million tones of potash annually with a strong focus on increasing this capacity. Mosaic has a heavy focus in Canada, Saskatchewan, were Mosaic's main competitor Potash Corp. of Saskatchewan (POT) is situated. Mosaic operates its largest potash mine in Canada with Canpotex managing the potash exports.

Another key product for Mosaic is Phosphate with Mosaic being the world's largest producer of finished phosphate. The company has a phosphate producing capacity twice the size of the next nearest producer.

What I like about Mosaic

In addition to being highly profitable with an operating margin of 25% and a return on equity of 18%, the company has a global presence and sells its products to about 40 key markets around the world. This global presence allows the company to leverage its existing customer base, increase cash flow and still have potential to penetrate new markets and find new customers especially in Asia and South America.

I predict the company to present strong demand for its phosphate and potash business based on favorable weather conditions in North America and the near-term outlook revision by the company's CEO:

"In advance of upcoming investor visits, The Mosaic Company announced today an update of the near-term market outlook for its Potash and Phosphates businesses."

Jim Prokopanko elaborated further:

"Global demand for crop nutrients has increased sharply, driven by an early and strong spring season in North America, combined with increasing shipments to South America," said Jim Prokopanko, President and Chief Executive Officer. "We expect demand to continue to grow, and crop nutrients to remain affordable. We anticipate another year of high farm income in North America - the second highest on record - and strong farm economics around the world. Our long-term outlook for the business is positive."

The underlying cartel structure of Canpotex, with Potash Corp., Mosaic and Agrium (AGU) as its constituents, is also quite valuable in my opinion, as cartels can influence the price mechanism in favor of its constituent companies and put consumers at a disadvantage. In addition, BMO Capital Markets is just out with a piece rating POT, Agrium and CF Industries Holdings (CF) as a BUY:

BMO Capital expects the severe drought in the Midwest to continue and sees even more upside for Agrium, Potash and CF Industries as a result. The firm has all three rated at Outperform, with POT considered the best value play of the bunch.

Outlook

I find it difficult to give a concrete estimate for the two main segments of phosphate and potash, as both volumes as well as prices have changed based on higher demand during the quarter. I estimate earnings to come in about 10% higher than compared to last year based on the CEO's near-term revision. If Mosaic numbers surprise substantially, the stock could be heading skywards. In this case, it is also likely that positive sentiment spills over to other fertilizer companies and competitors such as POT, AGU and CF.

Valuation

MOS is valued at only 11x earnings despite its high profitability and expected EPS growth of 14% next year. The company also achieves strong cash flow of $2.45 billion and has a net cash position of over $2 billion. Potash on the other hand, is even more profitable than MOS, with an operating margin of 48% and a return on equity of a staggering 37%. Given the higher profitability of Potash, compared to MOS, and an equal forward P/E of 11, I rate Potash as a BUY as well. This fertilizer company also has the strongest position in the Canpotex cartel giving it substantially more power to exert its interests. Potash currently quotes at $44. Just a quarter ago, UBS and BMO Capital Markets had price targets on POT of about $60 which have subsequently been reduced to $56 and $59 respectively, which gives the stock an upside of between 27-34%.

CF Industries, which I also rate a BUY, has the 2nd highest operating margin behind POT with 45% and a return on equity of 35%. The company trades the cheapest of the stocks mentioned with a P/E of 9.71.

If Mosaics numbers surprise, fertilizer companies could rally on expectations that the long-term outlook for the industry is more positive than currently priced in the market.

Source: Mosaic Could Soar On Q2 Numbers