Mosaic (MOS) Plots to Proliferate Profits in Potash and Phosphates - Barron's (POT)

Mosaic refers to art made out of bits of glass, stone, or tile. Just like creating a mosaic masterpiece, Mosaic Co. (NYSE: MOS) of Minnesota is trying to rearrange its pieces to create a beautiful earnings report, says a Barron’s article.

Mosaic shares have dropped amid the economic meltdown last year, but should rebound as farmers get new capital to replace the nutrients in the ground that they have used but were unable to replace before because of cost. As this replacement occurs, and demand is spurred, Mosaic should see share prices and earnings flourish. Farmers can generally put off fertilizing for a year or two before soil becomes too depleted.

Mosaic generates about 49% of sales from potash and 51% from phosphates.

Share of MOS have traded as high as $161 in June 2008, fell to $22 in November of the same year, and have bounced back to a current $57.50. Shares are trading at about 14x FY11 EPS estimates, which is even with their market.

Analysts also see FY11 as the year for recovery, when operating income is expected to be $2.5 billion and $3 billion for FY12. Mosaic recently saw FY09 profit of $2.4 billion and is expected to post FY10 profit down to $1.82 billion.

A risk to their phosphate business is Saudi Arabia building a plant. They are expected to be the lowest-cost provider based on their access to cheap natural gas. However, their impact may be only 5% of the market (about three million metric tons), and Mosaic thinks demand will be so, that the 5% should not impact their pricing.

Mosaic has less competition in the potash industry, with their major competition being Potash Corp. (NYSE: POT). A contract whereby Mosaic is to sell 1.3 million metric tons of potash to POT at little above cost is set to expire in the next year or two. That amount is equal to about 13% of Mosaics production of which its not getting fair market value for.

Mosaic is putting the profits back together, piece by piece.

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