Rising Food Prices Will Boost Debt-Free Mosaic Co. (NYSE: MOS) to New Highs

With so many companies - and countries - choking on the combination of slow growth and massive debt, investors are finding that there's a definite formula for success.

You need to look for companies that have healthy cash reserves, a global presence in a high-growth sector, and whose shares are available at a bargain price.

I've already found one to help get you started.

I'm talking about The Mosaic Co. (NYSE: MOS), an agricultural leader that's positioned to benefit from the worldwide run-up in food prices.

Mosaic is the world's leading producer of concentrated phosphate and potash, two of the primary nutrients required to grow food crops.

One of the main reasons I really like Mosaic is that it has enough cash - $3 billion - to fund its own growth. It doesn't need to borrow from banks to continue generating profits from crop-nutrient sales.

That's a profitable niche, since global food prices are expected to increase 4% next year, and could climb higher on supply squeezes. Increasing food demand and poor harvests have caused sharp climbs in the price of corn and other crops. And those price increases have translated into higher prices for pork, beef and poultry. The profitable agricultural industry outlook is enticing farmers to grow more, and will create a steady profit stream for Mosaic.

Mosaic's shares recently hit a 52-week low; but don't let that price dip fool you: While the market is currently pricing Mosaic for a significant slowdown in earnings, the reality is far brighter. It's time to buy The Mosaic Co. (**).

The Mosaic Co.

The Mosaic Co. is a young company with old roots, formed in 2004 from a merger of two giants in the crop nutrition businesses. This combination united profitable phosphate miner IMC Global Inc. with Cargill Inc., one of the world's top producers of phosphate and nitrogen fertilizer.

The resulting Mosaic Co. has grown into the largest producer of concentrated phosphates, and one of the leading providers of potash crop nutrients.

Mosaic's global reach - it has operations in 10 countries and serves markets in more than 30 nations - has allowed it to accurately estimate and provide for global product demand. It's this excellent business execution that helped Mosaic become debt-free, and then to amass a cash hoard of more than $3 billion.

This helped the company post an excellent first quarter for fiscal 2012, the second-highest-grossing first quarter in its history. The company's net earnings for the quarter ended Aug. 31 were 77% higher than the same quarter last year. Earnings per diluted share were $1.17, a 75% gain from 67 cents per diluted share in the first quarter 2011.

Mosaic's revenue now totals more than $10.3 billion in the trailing twelve months.

Fitch Ratings Inc. recently estimated Mosaic will earn $3.7 billion in EBITDA (earnings before interest, taxes, depreciation, and amortization) in fiscal 2012, a 19% gain from the $3.1 billion earned last year.

The stock is down 18% so far this year, but this has more to do with Cargill unloading its core investment in the company - essentially dumping a big block of shares on the market.

Mosaic's stock has rebounded from a 52-week low of $44.86 earlier this month to close at $61.96 Friday.

At this price it's still a bargain, giving us a chance to buy at extremely favorable prices.

The company has a market capitalization of $20 billion. The stock is trading at a Price/Earnings (P/E) ratio of less than 8, making it cheap in comparison to the overall market's P/E ratio of about 13 to 15.

Action to Take: Buy The Mosaic Company. (NYSE: MOS) (**).

Let's start a position in Mosaic. We'll then use some limit orders to pick up additional shares if the selling returns.

Let's pick up one-third of our proposed position at the market. Look to buy your second tranche 7% below that, and your third leg at 15% below current market prices.

The stock also has a liquid and active options market that we can use to pick up additional exposure through the sale of naked puts if the stock stabilizes around here.

(**) Special Note of Disclosure: Jack Barnes has no interest in The Mosaic Co. (NYSE: MOS).

About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning several times a week. In his previous BSH column, Barnes analyzed Vale SA (NYSE ADR: VALE).

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