Buy, Sell or Hold: Is Mosaic (NYSE: MOS) a Fertile Opportunity?

Planet Earth's inhabitants are expanding by 75 million people per year and are expected to reach a population of 9 billion people by 2050.

That's an awful lot of mouths to feed.

Furthermore, the land used for agriculture is not growing at the rapid pace it needs to keep up with this demand for food. Therefore, it is critical that farmers get the most out of their crop lands in order to supply the expanding protein-starved population.

Money Map subscriber, Wim D., suggested a review of fertilizer producer, The Mosaic Company (NYSE: MOS), as a business that will benefit from the ever-increasing global population.

Fertilizers are added to soil in order supply plant nutrients essential to the growth of crops. There are three basic types of fertilizers: nitrogen, phosphorus and potassium (potash).

Mosaic is a dominant player in two of the three. The company is the world's largest producer of phosphate and North America's second largest producer of potash. Its products are essential in the growth of corn, rice and cotton among others.

Mosaic's Pacing Its Growth

Phosphate is in abundance globally but it is found in only certain areas of the world. Mosaic has vast operations in Florida where it mines phosphate rock, processes phosphate through its chemical plants and delivers it around the world.

Net sales of phosphates were $1.5 billion for the most recently reported quarter, down 9% compared to last year's results. The reason was due to the lower price of the finished product. These lower prices are a definite sore spot for the company.
Many potential customers are turning to the third of the three fertilizer types that Mosaic does not have a market in - nitrogen. Nitrogen is made by the processing of natural gas which is still at very low prices. These low prices benefit those companies producing nitrogen fertilizers and by extension is a detriment to Mosaic which does not deal in this product.

Gross margin, however, was $266 million, or 18 percent of net sales, versus $259 million, or 16%, for the same period a year ago. This was primarily due to lower raw material costs.

A new exciting opportunity for Mosaic involves another area with deep phosphate reserves - Saudi Arabia. A partnership agreement was reached with Saudi Arabia's mining company, Ma'aden, for construction of phosphate facilities that could, by 2016, produce 3.5 million tons of phosphate fertilizers annually.

This $1 billion deal gives Mosaic a 25% stake in the new venture and will be of extreme importance for expansion into new major agricultural countries it did not have much prior access to such as India.

For Mosaic's potash, a nutrient that helps crops withstand dry conditions, sales were $758 million for the most recently reported quarter, up 37% compared to $553 million a year ago.

The gross margin rate declined though to 41% of net sales from 49% percent of net sales a year ago. The decline was due to lower potash prices, an unrealized loss on derivatives, higher depreciation and increased labor expenses.

Currently there is an excess supply of potash and Mosaic has responded by running its plants at 78% capacity. Until demand picks up or the company is able to strike new contracts with major agricultural countries this situation is unlikely to change.

The company even deferred the final 2 million tons of its potash expansion strategy because of unfavorable market conditions.

In the meantime, Mosaic has signaled some better prospects for potash production ahead with its extended and newly entered deals with India and China. Mosaic hopes that these deals will allow them to increase plant capacity incrementally in the future.

It would not be a stretch to say then that growth in sales may have reached its peak until these supply and demand issues have been resolved.

Takeover Target

Two years ago Mosaic was a spinoff of Cargill Inc. The repercussions from this spin off are still being dealt with. Through some complicated share conversions by Cargill shareholders, there is the potential for significant share dilution unless Mosaic purchases the shares that the Cargill shareholders will be unloading onto the marketplace.

The Company has been building a rock solid balance sheet in anticipation of buying back those shares. Mosaic (a $26 billion company) has $2 billion of surplus cash plus another $3 billion of debt capacity for potential share buybacks and returning capital to the Mosaic shareholders.

One by-product of this wholly independent Company is that it now becomes a target for a potential takeover. There has been much speculation by analysts that if Mosaic were taken over by some other entity within the realm of mining or crop production it would instantly become a global giant. Names such as BHP Billiton (NYSE: BHP) have been mentioned as it had attempted and failed to acquire, Mosaic's main competitor, Potash Corp of Saskatchewan (NYSE: POT). One Goldman Sachs analyst even put the odds of this happening at 30%.

Feast or Famine?

Mosaic's share price, unlike practically every other company in the S&P 500 today, has not been on a straight line upwards since the beginning of the year. In fact the share price hasn't done much since the start of 2012.

Mosaic (Mos) Buy, Sell, or Hold
(Source: Yahoo Finance)

In the very long term, the story of a growing population with little room to plant new fields for crops seems very forward thinking. I, however, believe we are a bit too early to the game and the opportunity costs of having money tied up in Mosaic can be too high.

Mosaic does have a dividend yield of 1.70% and the Company is determined to buy back shares in order to avoid share dilution. These movements may give investors continued patience with the hope of future capital gains. Plus, there is always the possibility of a takeover which keeps things somewhat interesting.

But, at this stage, I wouldn't be a buyer of Mosaic. At the same time I don't think you will be hurt by being a super-patient long term investor.

Therefore, The Mosaic Company is a HOLD.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.