Why This Stock Could Break Your Heart in 2013

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

7.5% gains in just 13 trading days – are you salivating? That’s what Mosaic (NYSE: MOS) investors have been treated to. A deal and some good numbers were enough to set the stock on fire. But what worries me is this: Is the momentum here to stay?

The first price bump came on Dec. 31 when China-based Sinofert Holdings inked a deal with Canpotex to buy 1 million tonnes of potash through June 2013. Mosaic is the second-largest stakeholder in the cartel after PotashCorp (NYSE: POT), responsible for 37% of its potash requirements. Why is the deal important? Three things: It came after a long wait, 1 million is a big quantity, and potash companies can finally get their stockpiles moving.

Jan. 4 propelled Mosaic’s stock further when the company beat Street estimates by a gaping margin. Good news, both of them. But, Mosaic’s numbers had more than meets the eye, and the deal just isn’t enough to ensure Mosaic peaceful nights through 2013.

Scratch the surface

Mosaic’s earnings per share for the past quarter came at $1.47 compared to $1.40 last year. Waving off one-time gains, the adjusted EPS of $1.02 was still well above Street estimates of $0.88 per share. Seems like the company managed to topple already downbeat estimates. Equally tepid were top line estimates, but Mosaic couldn’t live up to them. Its sales fell to $2.5 billion from $3 billion a year ago. I am not too impressed.

Nor did I find much weighting in Mosaic’s next quarter guidance. It expects higher sales volumes for potash but prices lower by 12% to 18% compared to last year. Yet, that’s not too bad because even at the lowest range of both measures, potash revenue should be higher year-on-year. The real problem is phosphate. Phosphate sales volumes are expected to be pretty much in line with last year, but again projected price range of $485 - $515 per tonne is well below last year’s $536 per tonne. Knowing that Mosaic derives nearly 70% revenue from phosphate, these projections spell trouble.

Some analysts were quick to give Mosaic a green thumbs up (read: higher price target) as soon as it reported the quarter. But I do not belong to the breed of analysts who make one or two quarters the one-all-and-be-all of critical buy/sell decisions; and the source of my doubt isn’t any of the numbers mentioned above. It’s the way the company has performed over the past twelve months, and the level its shares are trading at currently.

It’s bleeding

<img src="http://media.ycharts.com/charts/f15db360ce85d8466bc29a70e8a48bcb.png" />

data by YCharts

As if double-digit dip in revenue and net income over the past one year wasn’t enough, what really freaked me out was the plunging red line – Mosaic’s free cash flow is indeed having a free fall. So for net income amounting to $1.8 billion for the past twelve months, Mosaic’s free cash flow was less than $600 million. Lower profits and dwindling cash flows makes future growth possibility as uncertain.

Surprisingly, Mosaic’s share price doesn’t reflect any of this gloom. Gaining a massive 21% in the past two months alone, its shares are flirting with 52-week highs right now. How unpredictable Mr. Market can be at times! The million-dollar question is: Are there enough growth catalysts to look forward to?

There are better options

As I mentioned earlier, the Sinofert deal isn’t enough. Otherwise, Mosaic wouldn’t have toned down its full-year sales volume guidance after bagging the contract. I already spoke at length in my last article about the implications of the latest contract from China. Lower prices and an uncertain India are huge dampeners. PotashCorp’s recent presentation especially says a lot (check the link above). Mosaic could take the biggest hit as it gets more than 65% of its sales from international markets, and India is unfortunately its biggest export market. In fact, India was the reason why Mosaic lowered guidance.

Worse, Mosaic sells over 20% phosphate through marketing association PhosChem, which in turn gets 54% business from Indian markets. A fresh contact is unlikely before the second half, though even that isn’t certain. Latest news confirm India’s high inventory. According to Agrium’s (NYSE: AGU) latest Crop Input Market report, global phosphate prices have softened over the last month due to lower demand, especially from India. Shipments in North America are, however, higher than a year ago.

Though Agrium also bears the brunt as the third-largest member of Canpotex, it has the relatively stable nutrient nitrogen to fall back on, unlike Mosaic. Nitrogen also pushes Mosaic behind the other fertilizer player CF Industries (NYSE: CF), which isn’t as worried because it’s a pure nitrogen play. Not only did CF’s revenue improve 12% over the past one year, its free cash flow also shot up a massive 49% during the same period. Not surprisingly, CF’s stock rewarded investors with 25% gains.

Don’t expect much

There’s another hiccup: a litigation settlement with PotashCorp last year means Mosaic can export an additional 1.3 million tonnes via Canpotex this year onwards. This would have been a huge opportunity if international prices were firm. But Mosaic will now supply more at low prices, which will likely pressure margins further. Mosaic prospective cost advantages will also take several quarters to come through.

I don’t see much upside left in Mosaic’s shares as of now. And if at all, why wouldn’t anyone opt for a stock like CF that’s trading at much attractive valuations? All said, Mosaic is otherwise a financially sound company if only its fate wasn’t tied so closely to volatile global markets. Long-term investors may watch Mosaic closely for any dip. Click here to add Mosaic to your stock watchlist to stay updated.

Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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