Coverage Initiated on Mosaic - Analyst Blog

On Apr 21, we initiated coverage on The Mosaic Company MOS. While the company is expected to gain from its efforts to boost production capacity and acquisitions, it is exposed to volatility in phosphate and potash pricing.

The fertilizer maker saw its profit plummet around 79% year over year in the fourth quarter of 2013, reported on Feb 11, on lower prices for potash and phosphate. Adjusted earnings missed the Zacks Consensus Estimate. Revenues fell on declines across the board, but beat expectations. The company sees improving market conditions and expects potash prices to improve later this year.

Mosaic, a Zacks Rank #3 (Hold) stock, is the largest producer of finished phosphate products globally. It is well placed to leverage the rising global demand for grain and oilseeds. It also remains committed to return value to shareholders.

Mosaic's $1.4 billion buyout of CF Industries' CF phosphate business expands its production capacity of phosphate in Florida. The acquisition will bring Mosaic's annual phosphates capacity to more than 11 million tons and provide meaningful operational synergies.

Moreover, the recently announced acquisition of Archer Daniels' ADM fertilizer distribution business is expected to accelerate Mosaic's existing growth plans in Brazil and expand its annual distribution capability in one of the world's rapidly growing agricultural regions. The acquisition also complements Mosaic's other strategic initiatives including its purchase of CF Industries' phosphate business and joint venture with Ma'aden and SABIC in Saudi Arabia.

Mosaic also remains committed to expand its annual potash production capacity by roughly 5 million tons from the current levels. The company has made significant progress in its $5 billion potash capacity expansion projects.

However, Mosaic, like other fertilizer makers, is exposed to a weak pricing environment. Average realized phosphate price fell roughly 28% year over year in the fourth quarter, dragging down the company's revenues in the process. Pricing pressure was also witnessed in its potash business, partly due to cautious buyer behavior. These challenges may sustain in the near term.

Fertilizer makers face challenges following the exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company ("BPC"). Potash prices have declined sharply since the Uralkali cartel exit move.

While Mosaic expects higher potash import in India in 2014, Indian government's move to trim potash subsidy levels in an effort to cut fiscal deficit coupled with local currency devaluation may continue to lead to depressed demand for the nutrient in that country. As such, a material recovery in potash demand in India is not expected in the near term.

Other Stocks to Consider

Potash Corp. POT, which also belongs to the fertilizer industry, is worth considering with a Zacks Rank #2 (Buy).