Mosaic: Will The Upside Continue?

Summary

• Fertilizer stocks are in the spotlight following the news from Argentina.
• Mosaic's fundamentals appear sound, and the stock is slowly drifting to the upside.
• Longer term, I'm bullish. Short term, I wouldn't put much faith in the market increasing valuation multiples for Mosaic.

Recent days have put fertilizer equities back in the spotlight, following the release of data that points to problems in Argentina for corn and soybeans. Accordingly, both corn and soybeans have been enjoying some upside from their lows. Here's corn:

And here are soybeans:

So, the market started looking into buying some fertilizer exposure, and stocks like Nutrien (NTR), CF Industries (CF), Intrepid Potash (IPI) and Mosaic (NYSE:MOS) enjoyed one-time bumps on the news.

Mosaic has been in an uptrend since the second half of 2017, when it arguably got too cheap to ignore. The company's fourth-quarter results confirmed that the upside was well-deserved: it beat analysts' estimates on both earnings and revenue on the back of solid performance across all its segments. As I noted in my recent article on Nutrien, the potash market continues to improve, albeit at slow pace. Mosaic's production costs on the phosphates front also provide a decent margin by today's norms (see expectations for Q1 2018 margins below):

The purchase of Vale Fertilizantes, which is now Mosaic Fertilizantes, also bodes well for the company. Meanwhile, analysts' estimates are rising together with crop prices on expectations of improved pricing for fertilizers in the first quarter of this year:

Source: Yahoo Finance

At current prices, Mosaic is trading at roughly 15 forward P/E, a bit cheaper than its peer Nutrien. I'd argue that this is a conservative valuation, since fertilizers are starting to rise from lows, and if this trend gets the necessary momentum, earnings estimates would have to improve quickly.

I should note that there is a general market distrust toward commodities today, so even commodities that are on the upside are met with certain skepticism by market participants. However, the underlying fundamentals will ultimately matter, and for Mosaic they seem to be going in the right direction.

The potash market is showing slow but steady improvements. Once the market goes past the new supply additions from projects that were started long ago, it will see that demand continues to grow but no one has really invested in the space for quite some time. In my opinion, assuming production discipline from key players, namely Nutrien and Mosaic (wouldn't count much on discipline by Uralkali and Belaruskali), potash prices will have material room to increase in the coming years. The phosphates market is also showing improvements, with Mosaic's realized price rising from $329 per ton in the third quarter of 2017 to $348 per ton in the fourth quarter of 2017. With improvements on both major markets, the company will have to keep costs at bay and results will come.

That said, the market will likely demand more evidence of improvements before shifting more capital to Mosaic. While I certainly believe that the forward P/E may shift to 18-20 if positive results are evident (leading to a $32-36 price for Mosaic shares), it won't happen overnight.

I'd expect that shares will continue to move to the upside in a choppy fashion. The fundamentals appear favorable, but the market would likely demand more evidence before increasing the valuation for Mosaic. I'm cautiously bullish at current levels and would like to see a pullback for entry.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I may trade any of the above-mentioned stocks.