Mosaic’s Stock Is a Bit of an Enigma

04/23/2007 12:00 am EST

Focus:

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says shares of Mosaic, a producer of nutrients and animal feed, remain attractive, although they may tread water for a while.

Mosaic Company (NYSE: MOS) reported [disappointing] earnings last week, coming in below analysts’ expectations, even with a one-time non-cash accounting gain added in. One of the culprits was the flood at the Esterhazy [potash mine in Saskatchewan, Canada]. That upped expenses and lowered production. But overall expenses, including compensation, jumped, too, [for this producer of crop nutrients and animal feed.]

Interest expense is also higher than I like to see, but I’m hoping the refinancing the company undertook last quarter will lower that for the future. Mosaic’s debt-to-capital ratio is 41%. That is two-edged. With higher debt structures, increases in earnings really leverage return on shareholders’ equity. On the other hand, it poses some risk in case of a large fall off in business.

When Mosaic was spun off from Cargill, it was left with a big chunk of debt. With its excellent cash flow, it was assumed the company could pay it down relatively quickly, and so far, that’s going according to plan. Still, I like a conservative balance sheet, so I hope the company will pay down debt as quickly as possible. I’d rather see cash flow going to dividends than to interest payments.

As one might infer from the action of the stock (it was up 5%), the news wasn’t all bad. Top-line revenues soared 19%, and operating earnings increased to $34.2 million compared with a loss of $44.4 million a year ago.
Moreover, the outlook for coming quarters looks very good. Global demand for phosphate fertilizer is expected to increase by 4% to 5% in 2007, due to agricultural demand from India and Brazil. Strong growth in the biofuels industry is also helping: As the need for grain increases, so does the need for fertilizer. Strong demand has resulted in escalating phosphate prices. They’ll show up in Mosaic’s next quarter, and are expected to last at least into fiscal 2008.

One mid-tier broker downgraded Mosaic shares, and two major brokers upgraded them, but all set a price target near $33. As long as all the brokers aren’t pushing the stock, there’s still room to the up side, but I suspect the shares are ahead of themselves and due for a pullback. For most of us, the best plan is to do nothing, and let the shares ebb and flow on their way to a great future. Hold Mosaic Company.  (The stock traded just below $30 Monday morning—Editor.)

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