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Vanina Egea
Vanina Egea
Articles (218)  | Author's Website |

The Gurus Dump, You Should Buy

March 17, 2014 | About:

April is a key month for the agriculture calendar, and industry. The soybean harvest is half-way through in Latin America, while in the U.S. and China planting begins. Corn is another crop that will be planted in both countries, and in Europe. At the same time Australia plants winter wheat and a little later India will plant cotton. The high rate of activity around this specific month places great pressure upon agricultural input producers to delivery different nutrients and fertilizers, simultaneously, worldwide. To absorb these market synergies, companies are required to possess a well-oiled production and retail infrastructure. So, is Mosaic (NYSE:MOS) up to the challenge?

Segments and Seasonal Needs

Not all fertilizers are required simultaneously. These are determined by crop type and soil quality. Hence, nitrogen is applied in great quantities in the U.S. for wheat production, while in Brazil phosphate and potash are the most demanded nutrients by the same crop. Part of the reason for differing application is the salinity of Brazilian soil. On the other hand, China in general demands a great quantity of nitrogen due to soil qualities. Last, phosphate is used worldwide for fruits and farm crops.

Being the world’s leader phosphate producer, Mosaic is expected to serve the rice planting season in China, and worldwide grains and fruit planters. Opportunities in each market however, are not equal given the great production based in China. Hence, most opportunities for this segment lie outside China, being India and Brazil the most important single markets followed by the U.S. Last, the company holds a competitive advantage in this segment thanks to a vertical integration of assets, compounded by high phosphate rock prices.

Mosaic is not the leader in the potash segment, but it is comfortably listed among the top-three producers. And the most important markets are Brazil and China, where production is comparatively lower than consumption. However, the company is at a competitively handicapped in the segment due to high operational costs. Additionally, the potash market is currently under great pressure as the market conditions radically changed after the breaking-off of the Belorussian Potash Co.

Mixed Prospects for Sustained Growth

Mosaic is due to continue absorbing market synergies. However, growth is under great pressure due to declining potash and phosphate rock prices. Phosphate has recovered some ground, but is far from prices registered on August 2013, and even further for 2012 prices. A decline not fully offset by the competitive advantage of vertical integration. Nonetheless, a steady growing demand for food and planted areas worldwide, prospects for the company remain strong enough to expect a price recovery in the long-term.

Potash prices are the greatest trouble to Mosaic. After a steep decline during 2009, and a timid recovery through 2011, prices continue on a steady decline. Nonetheless, the company decided to increase production levels through capacity increments. To understand the decision, it is necessary to look at world consumption tendencies which have been, and are expected to continue, on the rise.

Contemplating Long Term

For the short-term, Mosaic will continue the difficulties mentioned above. Those difficulties will be compounded by a current shortage on train capacity in the U.S. Hence, the company is not expected to fully absorb market synergies this season. And if it does, it will be at a high cost.

In the long-term, prospects for shareholders are positive. Management has taken advantage of comparatively low stock price and continues to repurchase outstanding stock. The last purchase completed on March 13, entailed 3,092,429 Class-A shares from the Margaret A. Cargill Foundation. The policy will reevaluate those shares in hand of shareholders.

Amazingly, gurus have sold great part of their shares and some opted out at the end of 2013. The largest shareholder, RS Investment Management (Trades, Portfolio) showed little change. Currently trading at 10.8 times its trailing earnings, the stock carries a 25% discount to the industry average. With the stock set to start regaining value, it is recommendable to take a position for long-term.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website

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