With the growth in emerging economies – especially in China and India – there have been major changes in diets. The result is that demand has increased for premium foods. However, to increase supply, farmers often need to use better fertilizers.
This trend has been a boon for companies like Mosaic (NYSE:MOS). Over the past year, shares of the company have more than doubled and the market cap is now a hefty $36 billion. But keep in mind that back in 2008 the value was twice as high.
Does this mean there is more room on the upside? Let’s take a look at the pros and cons:
Pros
A global leader. Mosaic is the world’s No. 1 producer of phosphate, with a 13% market share. And the business is growing at a rapid rate. For example, in the latest quarter, the company’s phosphate revenue spiked 50%. The main driver was a big price increase.
Mosaic also is the world’s second-leading producer of potash, with a market share of 12% (the mines are based in Canada). But the company has seen a recent slowdown because of shipping problems. In the fiscal third quarter, revenue increased only 3.8%.
Supply and Demand. Even with disruptions in Japan and the Middle East, the demand for phosphates and potash continues to be robust. So healthy price increases should continue to propel the top line for Mosaic. What’s more, the global supply for phosphate and potash remains fairly tight.
Buyout Bait. In light of the difficulties of finding new sources of phosphates and potash, it makes sense that the best way to increase production is to buy a rival. Interestingly enough, Mosaic may be vulnerable to a takeover bid. The reason? The majority owner of the company, Cargill, is in the process of unloading its position. This should make a deal much easier to pull off.
Cons
Competition.The industry has a variety of major players. They include Potash (NYSE:POT), BHP Billiton (NYSE:BHP) and Agrium (NYSE:AGU). There is always the fear that these companies will rapidly increase production, which will put downward pressure on pricing.
Weather. Such things as hurricanes and even heavy rains can hurt Mosaic in terms of lower production and higher costs. This is especially the case for the phosphates business. Consider that Mosaic’s main operations for this segment are in Florida and Louisiana.
Foreign Exposure. About 65% of Mosaic’s business comes from overseas. As a result, the logistics and government regulations can be mind-numbing. For instance, a key risk factor is the tax situation in China.
At the same time, Mosaic is highly sensitive to an economic slowdown. And again, China is another issue. After all, the country has been showing signs of weakness lately.
Verdict
It looks like the growth story will remain intact for Mosaic because of the strong global demand and tight inventories. In the latest quarter, earnings surged more than doubled to $542.1 million and revenue increased by 28% to $2.21 billion. Gross margins saw a nice jump from 28% to 39% over the past year.
The valuation is also reasonable for a global leader like Mosaic — the price-earnings ratio is 18.
All in all, it looks like the pros outweigh the cons on the stock.
As of this writing, Tom Taulli did not own a position in any of the stocks named here.
