Shares of Mosaic Company Need More Catalysts for Further Upside

There have been no major moves in Mosaic Company  (NYSE: MOS  ) shares year to date. The reason for this is simple -- fertilizer prices have found a floor but were reluctant to make a robust rebound. The company recently released its first-quarter earnings report, which showed that Mosaic currently lacks any catalysts that could significantly increase its valuation.

Outlook for potash prices remains flattish
Potash prices continue to be under significant pressure. In the first quarter, Mosaic achieved higher realized potash price than its peer PotashCorp  (NYSE: POT  ) , but that's nothing to celebrate. Mosaic's average realized potash price was $267 per ton, down from $303 in the fourth quarter of 2013. In comparison, PotashCorp managed to sell its potash for $250 per ton, down from $282 in the fourth quarter of 2013.

Although it is most likely that those prices are the lowest we will see this year, the rebound is still far away. Mosaic stated that supply and demand remain relatively balanced in the potash market, so there may be no catalyst for a price increase in the near term. The long-term outlook remains bullish, but it is yet to be translated into real pricing. 

On the contrary, phosphates prices rose in the first quarter compared to the previous quarter. In this light the recent purchase of CF Industries Holdings' (NYSE: CF  ) phosphate business looks timely for Mosaic. With this acquisition, the share of the phosphate segment in Mosaic's revenue mix will increase further. This will have a positive effect on the company's bottom line, as phosphate pricing looks more promising than potash pricing.

Share-repurchase program is ending
Mosaic has an impressive share-buyback program that ends soon. The company was very aggressive in purchasing back its shares and repurchased 42.4 million shares at a total cost of $2 billion. Mosaic stated that it had agreements to repurchase an additional 9.3 million shares by the end of July. This buyback program provided significant support for Mosaic shares, reducing the number of outstanding shares and naturally improving all of the company's per-share metrics.

As the program ends soon, Mosaic's shares will be left without this support. It is unlikely that the company will extend its buyback program, as it has already purchased more than 10% of its outstanding shares. What's more, the company increased its debt by $2 billion in order to support its buyback program and the acquisition of CF Industries' phosphates business. Mosaic's cash flow from operations remains solid, but it can't help to finance significant buyback programs or a dividend increase in the near term without improvements on the fertilizer-price front.

Bottom line
Mosaic lacks catalysts that could improve the outlook for its business. The company targets $500 million in cost reductions over five years, but those savings are unlikely to be realized this year. Fertilizer pricing remains depressed, although there's cautious optimism regarding phosphate prices. The share-repurchase program ends soon and is unlikely to be extended.

Currently, there are no signs that Uralkali, which disrupted the potash marketplace by significantly increasing production, is willing to return to the previous status-quo. In this situation, Mosaic shares could stall at current levels.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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