I've written that fertilizer giant Mosaic (NYSE: MOS) looks like a solid bet. No company is perfect, and only close scrutiny can give us a clear picture. Let's take a look at where Mosaic stands.
Strengths
- Big name: Mosaic is the largest producer of potash and phosphate (combined) in the world. It has the second-highest stake in Canpotex, the legal cartel that controls all potash exports out of Saskatchewan, after PotashCorp (NYSE: POT).
- Innovation: Mosaic's innovative fertilizer product, MicroEssentials, has become its premium offering since it launched a few years back. The award-winning product's success has encouraged the company to expand its capacity to nearly 2.49 million tonnes. Mosaic's innovation initiatives continue with the recent introduction of the first animal and poultry feed phosphate product, Nexfos.
- Global brand: Mosaic has a huge global presence, with facilities across four continents and a customer base that extends to more than 40 countries.
- Operational and financial excellence:Mosaic's top and bottom lines have grown at impressive average annual rates of 31% and 89.4%, respectively, over the past two years. The company has an operating income of well over $2 billion and cash balances over $3 billion. With a low total debt-to-equity ratio of 9%, Mosaic can boast about solid financials.
Weaknesses
- Low dividend: One would expect a low-debt, cash-rich company like Mosaic to be a great dividend payer -- but that's not the case. Although it recently raised its annual dividend by 150%, that still boils down to a meager payout of 4.3%. Its current dividend yield is 1.1%.
- No nitrogen = low profits: Mosaic doesn't deal in the most important nutrient for crops -- nitrogen. Phosphate makes up 69% of its sales, while the remainder comes from potash. Demand for both nutrients has remained relatively flat over the past two decades, unlike that of nitrogen. Mosaic is thus at a disadvantage in relation to nitrogen-centric companies such as CF Industries (NYSE: CF). While CF had a great last quarter thanks to nitrogen, Mosaic lost out because of weak demand.
Opportunities
- High on potash: Recent settlement of a key potash tolling litigation means that from next year onward, Mosaic will be able to sell 1.1 million tonnes it currently supplies to PotashCorp to outside customers, apart from being able to export an additional 1.3 million tonnes through Canpotex. This, along with a 5 million-tonne potash expansion program currently under way, should add significantly to Mosiac's potash capacity.
- In favor: Resolution of an important pending phosphate mining case will allow Mosaic to run its South Fort Meade Mine in Florida at full capacity starting next year. The resultant higher phosphate rock production should help the company cut down costs significantly.
- Betting on corn The USDA has predicted record U.S. corn plantings this year. If that comes true (and the chances are high), Mosaic could be in for a great 2012.
- Global demand: Growing populations and increasing food consumption, especially in populous countries such as China and India, will mean higher demand for food crops and, in turn, for Mosaic's nutrients.
Threats
- Contract delays: India, an important market for Mosaic, hasn't entered into any contract with Canpotex this year. With 20% of the company's potash going to the nation, any further delays could mean a blow to its top line.
- Macro challenges: Lower crop prices adversely affect demand for nutrients. Oversupply and cautious buyer behavior compelled Mosaic and some peers to cut back production in the past few months, which in turn affected sales. So Mosaic's performance depends largely on crop prices, which are fairly volatile in nature.
The Foolish bottom line
Mosaic comes across as a fundamentally strong company that shouldn't find it difficult to ride through some macroeconomic challenges. It's worth a spot on your Watchlist.
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