A Fertilizer Stock Worth Betting On

Mosaic's (NYS: MOS) second-quarter numbers might look like a bummer, but there aren't many reasons to worry yet. I consider Mosaic to be a good bet in the fertilizer space. Here's why.

Nothing bad about the numbers
Mosaic's bottom line slumped nearly 39% to $623.6 million, but it wasn't due to lower revenue or out-of-hand costs. It was because of a $570 million gain from a business sale recorded in the year-ago quarter. If we exclude that, Mosaic's earnings were in fact up 37%.

Mosaic's sales rose 13%, to $3 billion, which shouldn't be surprising at a time when farmers across the globe are growing more to tap the agriculture boom. Both its segments -- potash and phosphate -- recorded jumps in sales backed by higher prices. But note that Mosaic's revenue growth was entirely because of higher prices, and not volumes. The company attributed this to lower international sales in countries like India and postponement of purchases by buyers owing to global uncertainty.

Did this surprise you?
Mosaic took many by surprise some days back when it announced plans to reduce phosphate production in the next three months, citing cautious buyer behavior and oversupply in the market as the reasons. Mosaic got company when another major player, PotashCorp (NYS: POT) , announced it would cut down production at its Saskatchewan plants. After temporarily shutting down two facilities, PotashCorp has announced a four-week shutdown at its third potash mine in February.

But if you think these moves portend a slowing down in the fertilizer industry, I beg to differ. It's true that a curtailment of important crop nutrients like potash and phosphate calls for attention, but it looks more like a temporary issue to me. The fact that Mosaic expects record phosphate demand for the full year gives us a better picture of the whole story. Also, if things weren't looking good in the longer run, why would Mosaic expand the production capacity of its premium phosphate product, MicroEssentials? Even PotashCorp is expecting record potash demand this year. That says a lot.

What's more, most of the big industry players are investing in major expansions. PotashCorp is undertaking major expansions at its potash mines, a good part of which is expected to be completed this year. Agrium (NYS: AGU) recently unveiled a major expansion program at its potash facility in Saskatchewan. The program will begin this year, and is expected to increase Agrium's annual production capacity by almost 50% once it gets completed by 2014. Mosaic's 5-million-tonne potash expansion program is well on schedule, with the company incurring capital expenditures of $267 million on the project in the second quarter. These clearly show how bright the future is looking for nutrients.

Gainful settlement
The other significant development for Mosaic during the quarter was the settlement of its tolling litigation with PotashCorp. Post the settlement, Mosaic's contractual agreement to supply almost 1.1 million tonnes of potash every year to PotashCorp will expire at the end of 2012. This will mean more potash in the company's hands to sell outside.

Mosaic is also expanding the mine (Esterhazy) from which it currently supplies potash to PotashCorp. With a significant portion of the expansion completed during the last quarter, coupled with the litigation settlement, Mosaic is now expecting the mine to add a lot to its capacity.

In Mosaic's favor
Several other factors tilt in Mosaic's favor. One is the company's second-largest stake in Canpotex, the three-member legal cartel -- made up of Mosaic, Agrium, and PotashCorp -- that handles Saskatchewan potash exports. Canpotex grabbed some big contracts last year, with supply under some to carry on throughout this year. Such contracts help lock in a good portion of expected potash sales for Mosaic.

Another noteworthy thing about Mosaic is its low debt and high cash position. Mosaic's total debt to equity is pretty low at 13.7%, with a huge war chest of $3.6 billion giving Mosaic a lot of scope to take on debt for growth plans if required, and improve its return on equity with higher leveraging. After buying shares owned by trusts related to former parent company Cargill, Mosaic could do well by dishing out more to shareholders and boosting its meager dividend yield of 0.4%.

The Foolish bottom line
Mosaic's business line is a big plus simply because the fertilizer industry will not go under unless we stop eating. Mix in strong financials, robust top-line growth, and great growth plans, and it looks like we have a winner here.

In fact, I feel if Mosaic's fear of softening demand and a tepid third-quarter leads to any dip in its share price, it would be a great entry point for prudent Fools. What do you think? Let your fellow Fools know using the comments box below.

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At the time thisarticle was published Neha Chamaria does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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