Color Me Bullish - Mosaic Remains A Buy As Industry Fundamentals Remain Strong

| About: The Mosaic (MOS)
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The Mosaic Company (NYSE:MOS), after the market closed Nov. 13, cut its Q2 2013 guidance forecasts for potash and phosphate sales due to uncertainty surrounding new contract agreements with India and China, the two biggest consumers of Potash. Mosaic's fiscal year ends in May.

The signing of new contracts with China and India is being anticipated by late summer. Both countries have so far balked at signing new potash contracts. There is an oversupply of potash in China, and the recent subsidy cut in India has made the nutrient too expensive for farmers.

Volume guidance for potash was lowered by 23% at the midpoint, from 1.6 to 1.9 million tons to 1.3 to 1.4 million tons, reflecting ex-North American weakness. On the other hand, the guidance for phosphate volume was trimmed by 6% at the midpoint. The new guidance range for phosphate is 2.9 to 3.1 million tons.

The company further said that due to delays in the settlement of contracts with India and China, international buyers are stepping out of the market, which drove the guidance declines. In an effort to avoid inventory price risk, distributors are stepping out of the market. The company sees this same trend in international phosphate customers as well, which are "delaying purchases in spite of low reported producer inventories," but notes further that the fall in fertilizer demand in North America remains steep.

We believe the volume losses should be recovered as contracts are settled with India and China and global buyers step back into the market. We expect contracts with China to be settled by Q1 2013 and one with India by Q2 2013. Additionally, the company now expects to recognize tax benefits that will lower its full-year 2013 tax rate to 14%-16%, as compared to previous guidance in the upper 20% range.

The delay in new contracts with China and India is old news; the market already knows it and we believe it is already priced in to the stock. The stock is likely to come under pressure in the near term due to the recent news and the negative sentiments surrounding the potash market, but long-term fundamentals remain strong. Our stance on MOS remains the same; we have an overweight rating. We believe sales are just delayed and not destroyed. The stock also offers a dividend yield of 2%.

We believe the fundamental agricultural outlook remains positive. As we mentioned in our previous article, the firm's high grain prices and elevated farmer income will increase the application of fertilizers as farmers look to capitalize on sound crop economics through enhanced yields.


Since MOS reported its new guidance, both MOS and POT are down by 3% and IPI by 1%. We are bullish on POT, whereas we have a neutral stance on IPI in the short term. However, as mentioned earlier, we have a bullish view on the industry, and we believe that the industry fundamentals remain positive. We are expecting strong performances from these companies in 2013.

Comp. Sheet

The Mosaic Company

Intrepid Potash (NYSE:IPI)

Potash Corp. (POT)

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Source: Yahoo Finance.

For a detailed analysis of Mosaic, please refer to our last article on the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article has been written by Qineqt's Basic Material Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.