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By Fani Kelesidou

With an average daily trading volume of four million shares, The Mosaic Company (MOS) is certainly one of the most popular stocks of the chemicals industry. Recently, the company presented its first quarter fiscal 2013 results. Despite the reported decline in quarterly earnings due to weak international demand, Mosaic foresees an outstanding outlook in the long-term.

Company Profile

Mosaic is a leading producer and supplier of potash and phosphate-based crop nutrients. The company has an annual potash capacity of 10.4 million tons, and annual phosphate capacity of 10.3 million tons. In 2008, Mosaic began a $6 billion potash expansion project. This program is estimated to enhance the company's operational capacity by 40 percent in the next decade. Mosaic employs 8,000 people and holds distribution facilities in eight countries. It operates two mines in the U.S. and three in Canada. Mosaic has a strong global presence and serves customers in more than 40 countries around the world. It was formed in 2004 and is headquartered in Plymouth, Minnesota

Competition

Some of Mosaic's major competitors include Potash Corporation of Saskatchewan Inc. (POT), Agrium Inc. (AGU), CF Industries Holdings, Inc. (CF), and Monsanto Company (MON). In terms of liquidity, Mosaic exceeds its competitors. It holds a current ratio of 3.90 and a long-term debt-to-equity ratio of 0.08.

In terms of valuation, with a P/E ratio of 12.77 and a forward P/E ratio of 10.28, MOS is considered to be cheaper than most of its peers. Monsanto has a P/E ratio of 23.49, while Potash's P/E ratio is 14.44.

Historical data on revenue growth is not so encouraging compared to the company's peers. However, Mosaic's operating margin of 23.7 percent is higher than the industry's average of 10.3 percent. Net margin of 17.4 percent is also much higher than the industry's average of 6.1 percent. Return-on-equity ratio of 14.8 percent is very close to the industry's same variable.

Financials Tracking

Mosaic's latest financial statement signaled a setback to the company's strong historical performance. For the first quarter of fiscal 2013, net earnings amounted $429 million, compared to $526 million a year ago. The year-over-year decline was primary attributed to low phosphate trade volumes and prices.

For the reported period, net sales were also reduced to $2.5 billion, down from $3.1 billion during the same period in 2011. The decline in net sales negatively impacted gross margin and operating earnings figures. In addition, operating cash flow was decreased to $339 million compared to $554 million in the prior year. Cash flow from operating activities deteriorated mainly because of higher inventory volumes and the consequent decline in customer prepayments. Even though, the phosphate segment remained tight clouded by supply uncertainties, this segment showed some improvement. For Q1 of fiscal 2013, net sales in the potash segment totaled $960 million which is 10 percent higher than a year ago. Total potash sales volumes stood at 1.9 million compared to 1.8 million last year.

Future Challenges

According to Jim Prokopanko, Mosaic's President, challenging weather conditions and soft demand in India and China were the main drivers of slow sales volumes. Deliveries in North America were negatively affected by the low Mississippi river levels, one of Mosaic's key barge routes.

For the next quarter, Mosaic expects potash sales volumes to range from 1.6 to 1.9 million tons. Phosphates sales are estimated to reach from 3.0 to 3.4 million tons. The operating rate for the potash segment is estimated to exceed 70 percent of operational capacity. The operating rate at the company's phosphate operations is expected to be above 80 percent of operational capacity.

Overall, the most recent financial results demonstrate a dubious performance. Nevertheless, Mosaic's past operating activities have provided it with capital adequacy. Historical data from 2005 to 2011 indicate an average operational cash flow growth rate of 78.96 percent. Mosaic's capital strength is also evident by the low LT debt-to-equity ratio compared to its peers. Moreover, the company has a powerful distribution network, which enhances its global presence. It operates 24 facilities spread around North America, Brazil, Argentina, Chile, Mexico, India, Thailand and China.

By the end of 2011, Mosaic was the largest P&K fertilizer producer (compound potash and phosphate fertilizers) with 5-year average production of 8.32 million tons. Second in the list was Potash with an average production 6.16 million tons. Also, after settling disputes regarding two of its mines, the company will have full access to its production capacity. Additionally, Mosaic has invested in a $6 billion potash expansion program. This is expected to generate over one million tons of extra capacity by the end of 2012.

Investors Sentiment

Currently, MOS is trading at around $54 versus its 52-week range of $62.65. Beta stands at 1.30. MOS is trading at relatively attractive valuations with a price-to sales ratio of 2.18 and a price-to-book value ratio of 1.83. Year-to-date stock returns stand at 7.38 percent. With a dividend yield of 1.85 percent, Mosaic is among the top dividend payers of the industry. POT has a dividend yield of 2.02 percent, while MON, AGU, and CF yield 1.70, 1.00, and 0.70 percent, respectively.

Out of 6 analysts tracked by Morningstar, two indicate a "hold" rating, one an "outperform" rating and two a "buy" rating. Morningstar gives MOS four stars and projects a 5-year growth forecast of 6.3 percent. Overall, the mean analysts' average target price is $64.63 suggesting at least 19.3 percent upside potential. Based on the FED+ valuation technique Mosaic stock has a fair value range of $66 to $96.

Conclusion

In general, the company's strong financial foundation provides resilience and flexibility against the market's volatility. As long as product incentives remain strong for farmers, Mosaic's expansion investments will be fruitful in the long-term. I strongly suggest that MOS is worth watching for upside trends along with other fertilizer companies.

Disclaimer: EfsInvestment is a team of analysts. This article was written by Fani Kelesidou, one of our writers. 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.

Source: Can Mosaic Outperform The Market?