Stock to Watch and Investment Analysis (Mosaic Co)

MOS

Sector: Basic Materials;

Industry: Agriculture Chemical

Business Model

It is the world's leading producer of potash and phosphate crop nutrients, key ingredients used in making fertilizer. It has four segments Phosphates, Potash, Nitrogen, and Offshore. The contribution to net sales by these four segments is 52%, 24%, 2%, 22% respectively.

Industry Analysis

With significant barriers to entry, the industry of potash has only a few players. Although suppliers of raw materials may increase the price of sulfur, its customers’ bargaining power is weak and fertilizer producers will be able to pass along any additional costs to the consumer.

Competitor Analysis

There are four major competitors in the industry, The Mosaic Company (MOS), Potash Corporation of Saskatchewan (POT), Agrium (AGU) and Terra Industries (TRA). MOS’s gross margin is the lowest compared with AGU and POT. Its operating margin and net margin is also significantly lower than POT.

Margin Growth

However, MOS' gross margin and net margin are improving over the years. From 2003 to 2007, the gross margin increases from 10% to 16%. At the same time, net margin increases from 3% to 7%. On a quarterly basis, both gross margin and net margin increased significantly in 2007 Q4 and 2008 Q1.

Top Line and Bottom Line

Over the last 5 years, revenue and net income are increasing steadily (the unusual expense in 2006 affected that year’s net income negatively). On a quarterly basis, revenue and net income increased significantly in 2007 Q4 and 2008 Q1.

In past several months, particularly in Jun, Sep, and Oct, analysts upgraded their recommendation on MOS. EPS for 08 and 09 were revised upward in the last 30 days. But the earnings for the current quarterly revised down by 1 cent recently.

Technical Analysis

The stock chart shows a clear upward trend. In the quarter of Aug 2007, the company beat analysts' earnings consensus and the stock price gapped up by $4.23.

Key Developments

Most recently, Mosaic Announces Prepayment of $150 Million of Long-Term Debt in Dec and reaches $1 Billion Prepayment Milestone.

Base on Google Finance, Goldman Sachs raised the price target of MOS to $120 from $65 on Dec 27, 2007.

Risk

A huge new phosphate-processing factory may open in Saudi in the next few years based on an article from Forbes on Dec 20, 2007 (Mosaic: Fertile Ground).

The price of sulfur almost doubled recently but the company should be able to pass the cost to customer.

Conclusion

MOS’s earnings will continue to increase and the stock price may go up ever higher