The Mosaic Company: A Fertilizer Spin-off With Potential To Grow

Includes: CSD, MOS
by: Andrew Corn

Plymouth, Minnesota based fertilizer producer, The Mosaic Company (NYSE:MOS), is another spin-off stock that is trying to make a name for itself in a niche market, as well as in the Clear Spin-Off Index, which is invest-able through the Claymore Clear Spin-Off ETF (NYSEARCA:CSD). Originally spun-off from Cargill Inc., the company merged with IMC Global and commenced trading on October 25, 2004. Today it stands as one of the world's leading producers of potash and phosphate crop nutrients, and the largest producer of processed phosphate.

Employing 8,000 people worldwide, MOS operates in phosphate, potash, offshore, and nitrogen segments. It produces phosphate fertilizer and mines, processes, and distributes potash in the U.S. and Canada. Through its offshore segment it produces blended fertilizer, and processes phosphate and nitrogen in parts of Brazil, China, and Argentina. Additionally, the nitrogen subdivision produces all of the company's urea and ammonia products.

MOS also prides itself as being an environmentally conscious company. The company has created an inexpensive system, called the InSite Variable Rate Nutrient System, that helps farmers monitor the quality of the soil on different plots of their land. This helps to apply the right amount of fertilizer to a particular plot of land. Preventing the over-application of crop nutrients not only reduces costs for farmers, but it also reduces the chance of nutrients ending up in run-off streams surrounding the land, protecting the wildlife that inhabits the area.

The last year has proven to be unsuccessful for MOS as their return on equity [ROE] is at -2.49% for the period with a quarterly year over year revenue growth rate of -8.20%. This can partly be attributed to soaring natural gas prices, a vital ingredient of fertilizer products. Prices have since leveled off and next year looks to be more promising for a number of factors. As a large potash mine in Russia is closed, MOS will be able to raise its prices. It has also been speculated that farm incomes are on the rise, globally, and that corn planting is increasing in North America. Ethanol is one of the drivers along with other bio-fuels.

There is also a certain upside to the company's financial performance. Its trailing twelve month operating margins are at 6.41% compared to the industry average at 5.49% and its net profit margin is at 8.46% compared to its peer group average at 5.30%. A year over year quarterly earnings growth of 43.20% also shows promise for growth in 2007.

In terms of valuation, the company is still floundering but also has signs of potentially better times. Its negative numbers are pretty well priced into the stock price; after earnings in April the stock faltered through mid-June and has steadily risen since. The firm which has a market cap north of $9.5 billion is followed by two major sell side firms and has decent trading volume. The firm boasts FMR and Lord Abbett as its top five shareholders.

Its price to book [P/B] value is at 2.59 compared to the agricultural chemicals industry average of 5.30. This may be a sign that many investors are currently not interested in a company with negative returns. More importantly, it indicates that the company based on its fundamentals, has potential to have a much better 2007.

MOS 1-yr chart


Disclosure: The author is the founder of Clear Asset Management, which provides the index that the Claymore Clear Spin-Off ETF is based upon.