Is Mosaic A Good Buy?

| About: The Mosaic (MOS)
This article is now exclusive for PRO subscribers.


The agricultural input industry has been facing depressed pricing environment.

Trends are steadily improving for fertilizers.

Mosaic is heading in the right direction.

Over the past two years, the agricultural input industry has been experiencing pricing pressure due to the imbalance between supply and demand. Potash and Phosphate, two main fertilizers, were also impacted significantly during that time. Imbalance between supply and demand dynamics is only due to the excessive supply of Potash and Phosphate. In addition to the increase in domestic production from countries like India and China, Uralkali (OTC:URALL) announcement of expansion of production in the start of this year added more volatility in the potash market. Moreover, Potash and phosphate producers are growing their production in a cost effective way to offset the pricing pressure with volumes

Mosaic Co (NYSE:MOS) is one of the leading producers and marketers of agricultural inputs including phosphate, potash and other ingredients. After suffering losses in sales and earnings in the past few quarters, the company has been seeing stabilizing trends with the massive growth in its volumes and production levels. In addition, it is anticipated that demand for potash may strengthen in the coming days with closure of the Russian mine. On the other hand, the company is on momentum to generate additional tonnes in 2014 than in any of the previous five years.

The company has demonstrated this trend in the most recent quarter as both its revenue and earnings increased compared to the last period on the back of improved sales volumes even when prices are comparatively lower than 2013. Mosaic has posted sales of $2.3B compared to $1.9B in last year and earnings per share came at $0.54/share relative to $0.29/share in the last year. Its phosphate production reached 2.5 million tonnes compared to 1.9 million tonnes in the last year. Due to the higher sales volumes, sales from the phosphate business expanded to $1.7B compared to $1.4B. However, it had faced hurdles for potash production due to the weather related problems. Its potash production came down to 1.7 million tonnes compared to 2 million tonnes in the last year.

Moving on, the company is looking to generate higher sales and earnings for the full year on the back of cost saving, improved production and higher sale volumes. In addition, Mosaic is setting strong foot-prints for future growth with its expansion strategy. The integration of phosphate business of CF Industries is on progress and the company is successfully moving towards the completion of the acquisition of ADM's fertilizer distribution business. Its Ma'aden phosphate joint venture is swiftly advancing and the expansion Esterhazy K3 mine is on progress. Overall, the company is seeking to take advantage of higher volumes.

Its cash generating potential is also improving with the improvement in its earnings. In the most recent quarter, it had generated operating cash flows of $489 million compared to $45 million in the past year quarter. Its operating cash flows are providing a complete cover to its capital requirements of $188 million and dividend payments of $94 million. Here, I believe that the company's operating cash flows are offering a room for an increase in its dividends. In addition, Mosaic has cash and cash equivalents of around $3B when long-term debt is standing at $3.8B. Therefore, I am not citing any liquidity problems for the company.

In Conclusion

I am not seeing any big potential risk to the company's business model, financial situation and dividends. In addition, fundamentals are improving for agricultural input industry and demand has been rising for fertilizers. The company has been continually expanding its production level in a cost effective way which is enhancing its financial position. At present, the company's stock is trading at discount based on price to earnings of only 10.3 and price to book ratio of only 1.7. I'm not anticipating a strong upside potential for the company's share price due to depressed commodity prices, but long-term fundamentals are strong. However, its dividends are safe and the company has potential to make an increase in dividends.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.