Giving Mosaic a Green Thumbs Up

| About: The Mosaic (MOS)

Another down market last week. Trying to find long candidates in a market like this is tough, to say the least. Selling short was pretty easy over last two weeks, as it seemed just about everything was going down. There have been some bull winners longer term. The agriculture sector stocks have done real well these last fifty two weeks. I don’t like chasing prices, so I have not been in on the big bull run of this sector, until now.

After scanning the charts, up popped on my radar a low risk high reward trade on a basic materials company providing key ingredients to create fertilizer. I’m personally involved in the agriculture industry somewhat, and have done much research as to what the future holds for this industry. I’m a bull long term on this industry for two main reasons. (1) The ongoing global food crisis, and (2) the fact that the emerging countries around world are only using about 30% of the fertilizer the western world is using. These two main factors can contribute to a substantial amount of growth going forward long term in this industry and these stocks.

The stock I'm putting a buy rating on this week is an agriculture stock that has taken about a 20% downward recent correction starting from June 18th. I’m hoping and looking for just a little more downside on the price to buy in. I wouldn’t be surprised if the price goes as low as the stop-loss I’ve set for it, as I've described below, before returning on its uptrend. The bigger the price moves up, the bigger the price could move down too. Now onto this agriculture stock pick of mine.

Investment Recommendation

The Mosaic Company  (NYSE:MOS)

Current Closing Price (as of July 3rd): 132.29

  • Entry Option #1
    • Buy at 125.41 to 123.20
    • Stop-Loss: 112.98
  • Entry Option #2
    • Buy at 112.98
    • Stop-Loss: 110.99
  • Take Profit Areas
    • Very Short Term: 150.68 – 159.56
    • Short Term: 160.74 – 167.93
    • Intermediate Term: 170.02 – 177.63
    • Long Term: 191.67 – 200.25
    • Longer Term: 254.33 - 265.70

Upcoming MOS Earnings Statement

The Mosaic Company will be reporting their 4th quarter 2008 fiscal year earnings on July 29 at 8:30AM ET.

MOS Buy Analysis Commentary

With commodity prices at record highs, it could be said that it's a bit risky to be investing this sector in the short term. Longer term, the agriculture sector is a rock solid investment, in my opinion. During the short term possibly, the big cap agriculture stocks could take a breather from their huge upside moves this year, while the lagging agriculture stocks could possibly play catch up. I'm not saying this will happen. I'm just saying be on the lookout for this possibly happening.

Regardless of what or what may not happen, my buy pick above on MOS stands, as the company is one of the big cap high flyers in the agriculture business that could take on more profit selling before a fresh batch of buyers come back in. I’m expecting that MOS will continue their uptrend after shaking out the loose hands who think the high flying agricultural stocks will sell off because they’ve gone up so much this year. One thing I’ve learned from past financial market experience, is that just because prices seem high, doesn’t mean that the price is coming down, and vice versa. Here’s a cliché, ”The trend is your friend”. In my view, this definitely applies in this industry currently. The current correction looks like a beautiful buying opportunity on a continued uptrend.

Company Profile

The Mosaic Company (Mosaic) is a producer of phosphate and potash combined, as well as nitrogen and animal feed ingredients. The Company operates its business through four business segments: phosphates, potash, offshore and nitrogen. The Phosphates segment operates mines and concentrates plants in Florida that produce phosphate fertilizer and feed phosphate, and concentrates plants in Louisiana that produce phosphate fertilizer. The Potash segment mines ad processes potash in Canada and the United States and sells potash in North America and internationally. The Offshore segment produces and markets fertilizer products and provides other ancillary services to wholesalers, cooperatives, independent retailers, and farmers in South America and the Asia-Pacific regions. The Nitrogen segment consists of its equity investment in Saskferco and Mosaic’s nitrogen sales and distribution activities.

The following is from Mosaic's website:

June 3 Mosaic Financial Guidance Announcement

The Mosaic Company announced today its financial guidance for its first fiscal quarter ending August 31, 2008 and for its fiscal year ending May 31, 2009. This financial guidance is also being provided during presentations at investor conferences in New York City, NY on June 4 and 5, 2008.

"We anticipate reporting robust fourth quarter results in fiscal 2008 as strong demand and the tight supply situation continues for crop nutrients," stated Jim Prokopanko, President and Chief Executive Officer of Mosaic. "Given the world's burgeoning demand for grains and oilseeds, our fiscal 2009 financial guidance reflects strong financial performance momentum and underscores Mosaic's commitment to investing in the crop nutrition industry and helping farmers produce crops with greater yields," Prokopanko added.

The following statements are based on current expectations. These statements are forward-looking and actual results may differ materially.

Sales Volumes and Selling Prices

Phosphate sales volumes are expected to be in the range of 9.0 to 9.4 million tonnes for fiscal 2009. This increase is contingent upon sourcing an adequate supply of sulfur, operating mine and plant sites at high operating rates and restarting certain previously indefinitely closed phosphoric and sulfuric acid production in the second half of the fiscal year. The restart of this phosphoric and sulfuric acid production will permit Mosaic to utilize excess granulation capacity at one of its existing plants.

Potash sales volumes are expected to be 8.2 to 8.6 million tonnes in fiscal 2009. Previously announced potash capacity expansion projects will be underway in fiscal 2009; however, production from the first of the expansions will not come online until fiscal 2010. This volume estimate assumes, among other things, operating the potash facilities at high operating rates and continued successful management of the brine inflow at the Esterhazy mine.

Mosaic estimates a realized DAP price, FOB plant, in the range of $1,020 to $1,080 per tonne in the first quarter of fiscal 2009 and an estimated average realized MOP price, FOB plant, in the range of $460 to $510 per tonne for the same quarter. Both estimates assume farmer economics remain robust and that management has accurately estimated the mix of forward versus spot sales.

MOS Capital Spending

Capital spending for fiscal 2009 will grow significantly to a range of $900 million to $1.1 billion. This is more than double the company's historical rates. Mosaic will pursue capital projects with high returns, including expanding its potash capacity and reducing phosphate costs, along with increasing preventive maintenance projects designed to continue to attain high operating rates at its facilities. These projects are fairly evenly split between the phosphates and potash business segments.

Canadian Resource Taxes and Royalties

Mosaic is also providing guidance on Canadian resource taxes and royalties for fiscal 2009. Expected profitability growth and escalating potash selling prices are expected to result in higher taxes and royalties than in previous years. Canadian resource taxes and royalties are estimated to range between $700 million and $1 billion in fiscal 2009. Management's estimate of the resource tax ad royalties requires management to make significant assumptions about a number of matters, primarily projected selling prices and volumes, capital spending and foreign currency exchange rates. These items are included as a component of cost of goods sold in the company's consolidated income statement. By comparison, these taxes and royalties are expected to approximate $400 million in fiscal 2008 and were approximately $120 million in fiscal 2007.

Other

Selling, general and administrative expenses are expected to range between $360 and $390 million for fiscal 2009. Mosaic estimates an effective income tax rate in the low to mid 30% range for fiscal 2009.