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We recommend buying Mosaic (NYSE:MOS) ahead of its Q3 2012 earnings release on Tuesday, Oct. 2, 2012, for a short-term speculative trade. Our bullish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends, and technical strength.

Valuation -- Slightly Undervalued

We believe Mosaic to be fairly valued on an absolute basis and undervalued on a relative basis. On an absolute basis, based on consensus analyst estimates, Mosaic is valued with a 2013 P/E of 10.7 times and 2013 EV/revenue of 2.3 times, which we believe to be near fair value, given its projected 2013 EPS growth of 9%, and 2013 revenue growth of -1%. However, on a relative basis when compared to its publicly traded comparables, Mosaic is valued at a discount to Potash (NYSE:POT) and Monsanto (NYSE:MON) on both 2013 P/E and 2013 EV/revenue. While analysts expect Mosaic to grow slower than Potash and Monsanto, we believe the current valuation discount gap to be larger than warranted.

A summary analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Mosaic and its comparables:

Valuation Multiples

Market
Cap (NYSE:MM)

Enterprise
Value

P/2013
EPS

P/2012
EPS

EV/2013
Revenue

EV/2012
Revenue

MOS

24,942

22,182

10.7x

11.7x

2.3x

2.3x

POT

37,816

41,475

11.7x

13.0x

4.7x

5.0x

MON

48,813

49,163

21.0x

24.6x

3.4x

3.6x

Growth

Revenue
Growth

EPS
Growth

FY13

FY12

FY11

FY10

FY13

FY12

MOS

-1%

-13%

12%

47%

9%

12%

POT

8%

-6%

33%

64%

11%

-4%

MON

7%

15%

13%

-10%

17%

26%

Profitability

Gross
Margin

EBIT
Margin

FY11

FY10

FY09

FY11

FY10

FY09

MOS

27.8%

31.4%

25.1%

23.5%

26.8%

18.8%

POT

49.2%

41.1%

25.5%

49.4%

39.7%

29.7%

MON

51.4%

48.3%

57.5%

21.2%

15.3%

26.2%

Source: Company filings, Yahoo Finance.

Analyst Estimate Trends -- Bearish

Current Analyst Estimates: Revenue estimates for Mosaic's current quarter range from $2.74 billion to $3.02 billion, with an average estimate of $2.88 billion (-6.6% from $3.08 billion in Q3 2011), while EPS estimates range from $1.05 to $1.27, with an average estimate of $1.15 in EPS (-1.7% vs. $1.17 in Q3 2011).

Current Quarter
Estimates

Revenue

EPS

Average

2,880

1.15

Low

2,740

1.05

High

3,020

1.27

Year Ago

3,083

1.17

% Growth

-6.6%

-1.7%

EPS Surprise History -- Neutral

Mosaic has moderately beaten EPS estimates in two of the past four quarters, while moderately missing EPS estimates the other two quarters.

Q2 2012

Q1 2012

Q4 2011

Q3 2011

EPS Estimate

1.17

0.76

1.30

1.27

EPS Actual

1.19

0.72

1.40

1.17

% Surprise

2%

-5%

8%

-8%

EPS Estimate Revisions -- Bearish

Recent analyst EPS estimate revisions have been bearish, with Q3 2012 EPS being revised down from $1.20 (90 days ago) to $1.16 (60 days ago), and further down to $1.15 (current).

FY13

FY12

Q4 2012

Q3 2012

Current

5.46

5.03

1.33

1.15

7 Days Ago

5.46

5.03

1.33

1.16

30 Days Ago

5.46

5.03

1.33

1.16

60 Days Ago

5.42

5.03

1.34

1.16

90 Days Ago

5.21

5.03

1.35

1.20

Source: Yahoo Finance.

Technical Strength -- Bullish

We believe Mosaic's underlying technical strength, as measured by its historical share price performance, to be bullish with its longer-term moving averages and all MACD oscillators under bullish signals.

Moving Averages

  • 20-Day Moving Average: Bearish
  • 50-Day Moving Average: Bullish
  • 100-Day Moving Average: Bullish

MACD

  • 20- to 50-Day MACD Oscillator: Bullish
  • 20- to 100-Day MACD Oscillator: Bullish
  • 50- to 100-Day MACD Oscillator: Bullish

Disclaimer: Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.

Source: Buy Mosaic Ahead Of Q3 2012 Earnings