March 09, 2015 The Mosaic Company Current Recommendation Prior Recommendation Neutral Date of Last Change 03/09/2015 Current Price (03/06/15) $49.03 Target Price $59.00 OUTPERFORM (MOS-NYSE) SUMMARY We are upgrading our recommendation on Mosaic to Outperform following its strong fourth-quarter 2014 results. Profit for the quarter surged year over year on increased potash volumes and higher phosphate pricing. Both revenues and adjusted earnings beat Zacks Consensus Estimates. The company sees strong demand to continue in 2015 and expects to gain from its strategic actions. Mosaic is well placed to leverage the rising global demand for grain and oilseeds. Moreover, the company should gain from its efforts to boost production capacity and acquisitions of CF Industries phosphate unit and Archer Daniels fertilizer distribution business. It also remains committed to return value to shareholders. SUMMARY DATA 52-Week High $53.56 52-Week Low $40.76 One-Year Return (%) 0.63 Beta 1.35 Average Daily Volume (sh) 3,701,990 Shares Outstanding (mil) 372 Market Capitalization ($mil) $18,239 Short Interest Ratio (days) 1.18 Institutional Ownership (%) 73 Insider Ownership (%) 0 Annual Cash Dividend $1.00 Dividend Yield (%) 2.04 5-Yr. Historical Growth Rates Sales (%) 3.5 Earnings Per Share (%) 1.1 Dividend (%) 61.8 using TTM EPS 18.4 using 2015 Estimate 14.0 using 2016 Estimate 12.4 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * Low, Type of Stock Large-Value Industry Fertilizers Zacks Industry Rank * 25 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 2,241 A 2,692 A 1,909 A 2,182 A 9,024 A 2014 1,986 A 2,440 A 2,251 A 2,379 A 9,056 A 2015 2,267 E 2,799 E 2,499 E 2,650 E 10,215 E 2016 10,602 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.94 A $1.12 A $0.51 A $0.36 A $2.93 A 2014 $0.54 A $0.70 A $0.56 A $0.87 A $2.66 A 2015 $0.77 E $1.03 E $0.80 E $0.89 E $3.49 E 2016 $3.95 E *Note: EPS in 2014 do not add up to annual figure due to rounding-off. Projected EPS Growth - Next 5 Years % 7 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Founded in 2004, Plymouth, Minnesota-based The Mosaic Company (MOS) is a leading producer and marketer of concentrated phosphate and potash for the global agriculture industry. It was formed through the combination of the fertilizer businesses of agribusiness giant Cargill Incorporated and IMC Global Inc. The company, which participates in every aspect of crop nutrition development, employs around 8,900 people across six countries. Mosaic mines phosphate rock from around 200,000 acres of company-owned land in Central Florida. It also mines potash from five mines in North America, mainly in Saskatchewan. Its products are processed into crop nutrients, and then shipped thorough rail, barge and ocean-going vessel to customers in major agricultural centers globally. The company s Board, in Dec 2012, approved a change in its fiscal year end to Dec 31 from May 31. Mosaic began reporting quarterly results on a calendar-year basis with the quarter ending on Sep 30, 2013. Mosaic operates through two segments Phosphates and Potash. The Phosphates division makes concentrated phosphate crop nutrients and phosphate-based animal feed ingredients. Roughly a third of the company s phosphate product is shipped within North America, with the balance exported worldwide through both export association PhosChem and the company s own distribution channels. Mosaic delivers around 19 million tons of phosphate products to roughly 40 nations annually. Mosaic s Potash unit makes and markets potash for use as fertilizers and animal feed ingredients, and for a host of industrial applications. With annual capacity of 10.3 million tons, the company is a leading player in the potash industry. Mosaic, in March 2014, completed its takeover of CF Industries (CF) phosphate business for $1.4 billion. The facilities acquired by Mosaic produce roughly 1.8 million tons of phosphate fertilizer per year. REASONS TO BUY Mosaic is the largest producer of finished phosphate products globally with annual capacity more than the next two largest producers combined. The company is also a global leader in potash and remains committed to expand its annual potash production capacity by roughly 5 million tons from the current levels. The company has made significant progress in its $5 billion potash capacity expansion projects and has completed K2 underground and mill expansions at its Esterhazy mine during 2013. It is making a good progress with capacity expansion at Esterhazy (the K3 project) with deliveries from the expansion is expected in 2017. The company also entered into an agreement with Ma aden and SABIC in Saudi Arabia in 2013 to develop a 3.5 million ton integrated phosphate mine and granulation operation. Under the pact, Mosaic will hold a 25% interest in the joint venture and market roughly 25% of its production. The low-cost operations are expected provide Mosaic improved logistical access to major global markets including India. Mosaic is progressing well with the joint venture project and has secured project financing of $5 billion. Mosaic is strongly positioned to leverage the rising global demand for grain and oilseeds. Demand for potash and phosphates is expected to remain strong through the North American spring application season. Low inventory levels in India, a major import market for phosphate, should contribute to higher demand for the nutrient in that country. Demand for nutrients in India is expected to be strong in 2015 on the back of the recent changes in the fertilizer subsidy structure. The company s phosphate business is also expected to benefit from favorable pricing and lower raw material costs. Equity Research MOS Page 2
The buyout of CF Industries assets expands Mosaic s phosphate business and production capacity of the nutrient in Florida. It also complements the company s plans to mine phosphate rock reserves in Hardee and Desoto counties and expansions of the existing Wingate mine. The acquisition will bring Mosaic s annual phosphates capacity to roughly 11.5 million tons (with the addition of 1.8 million tons). Mosaic has completed the integration of the acquired business and is on track to achieve $40 million to $50 million in annual synergies (before-tax) in 2015. The acquisition is also expected to add roughly $0.30 per share to Mosaic's earnings per share in 2015. Moreover, the acquisition of Archer Daniels Midland Company s fertilizer distribution business has expanded its annual distribution capability in South America s growing agricultural markets to around 6 million metric tons of crop nutrients from roughly 4 million metric tons. Mosaic s board, in Feb 2014, approved a $1 billion share repurchase program, allowing it to buy back Class A or common shares through direct repurchases or open market transactions. This is in addition to the earlier announced agreement to repurchase 43.3 million Class A shares from the Margaret A. Cargill Foundation and the Anne Ray Charitable Trust ( the MAC Trusts ) in the first seven months of 2014. The company subsequently reached a deal with certain Cargill family trusts to buy back roughly 8.2 million Class A shares. Mosaic, in Jul 2014, completed the repurchase of roughly 52 million shares, representing 12% of its outstanding shares at the end of 2013. It returned $2.8 billion to its shareholders in the form of share repurchases in 2014. RISKS Mosaic is facing a challenging business environment in agriculture and there is a continuous negative sentiment among agriculture investors that can create uncertainty in 2015. A bumper harvest could possibly bring prospects of lower income for growers in 2015, making them skeptic in their business and resulting in deferral of input purchasing decisions in a bid to cut costs. Weak commodity pricing coupled with anticipated reduction in planted acreage may weigh on demand for nutrients in the next spring application season. Mosaic, like other fertilizer makers, is exposed to a still challenging pricing environment. The company is seeing depressed pricing for grain and oilseed. Agricultural commodity prices in general remain weak. Mosaic is also exposed to macroeconomic uncertainties and other issues such as volatility in prices for key raw materials including ammonia and sulfur and currency exchange fluctuations (mainly Canadian dollar and Brazilian real). Unfavorable swings in costs of key inputs ammonia and sulfur may hurt the company s cost structure (costs per ton to produce phosphate products) and profitability. Mosaic has seen significant fluctuations in ammonia and sulfur prices in the past. Equity Research MOS Page 3
RECENT NEWS Mosaic's Earnings Beat in Q4, Profit Shoots Up February 11, 2015 Mosaic s profit surged nearly three-fold in fourth-quarter 2014, boosted by increased potash volumes and higher pricing in its core phosphate business. The company saw higher demand in the quarter as customers looked to replenish inventories ahead of the spring application season in North America. Mosaic s profits, as reported, were $361 million or $0.97 per share in the reported quarter, jumping from $129 million or $0.30 a share a year ago. Barring one-time gains, earnings per share were $0.87 per share, beating the Zacks Consensus Estimate by $0.01. For 2014, the company reported a profit of $1 billion or $2.68 per share versus $1.1 billion or $2.49 per share posted a year ago. Adjusted earnings were $2.66 per share for the year. Revenues rose 9% year over year to $2,378.6 million in the quarter on gains across both phosphate and potash businesses. It also beat the Zacks Consensus Estimate of $2,366 million. For the full year, revenues edged up 0.4% year over year to $9,055.8 million. Segment Highlights Revenues from Mosaic s Phosphate segment rose 4% year over year to $1.6 billion in the quarter as increased finished product prices more than offset lower volumes. Average selling price climbed around 18% to $448 per ton in the quarter from $381 per ton last year. The segment s gross margin surged around 52% to $286 million, aided by higher pricing. Segment sales volumes went down roughly 3% year over year to 3.3 million tons. Potash division s sales moved up around 17% year over year to $763 million in the quarter as lower prices were more than offset by higher shipment volumes. Sales volumes jumped roughly 21% year over year to 2.3 million tons while selling price fell roughly 3% to $295 per ton from $303 per ton a year ago. Gross margin more than doubled year over year to $304 million, supported by lower costs. Financials Mosaic ended 2014 with cash and cash equivalents of $2,374.6 million, down 55% year over year. Longterm debt climbed nearly 26% over year to $3,778 million. Mosaic s capital expenditures and investments in the company s joint venture in Saudi Arabia were $254 million in the reported quarter. Operating cash flow was $382 million in the quarter, down 24% from $503.2 million a year ago. Mosaic repurchased 59.1 million shares worth $2.8 billion during 2014 including 5.9 million in the fourth quarter. Outlook Moving ahead, Mosaic sees strong demand to continue in 2015 and expects to gain from its strategic actions. The company expects sales volume for its phosphates business to be between 2.8 million and 3.1 million tons in the first quarter of 2015 compared with 2.7 million tons achieved a year ago. Average selling price for the quarter is expected to be in the band of $440 to $465 per ton. Equity Research MOS Page 4
The segment s gross margin for the quarter is expected to be in the mid-teens percent. Operating rate is expected to be 80%-85%. Mosaic expects sales volume from its potash business in the range of 2 million to 2.3 million tons in the first quarter versus 2.4 million tons a year ago. Average selling price for the quarter is expected in the range of $270 to $295 per ton. The segment s gross margin is expected to be in the high 30% range. Operating rate has been forecast in the 85%-90% range as the company prepares for strong expected demand in the spring application season. For 2015, Mosaic expects phosphates sales volumes in the band of 14.5 million to 15 million tons. Potash sales volumes are expected in the range of 8.5 million to 9 million tons for the year. Capital expenditures and investments are expected in the range of $1.1 billion to $1.4 billion. Mosaic's Q3 Earnings Lag, Phosphate Drives Profit October 30, 2014 Mosaic s profit jumped in third-quarter 2014, buoyed by higher sales volumes and pricing in its core phosphate business. The company saw higher demand for phosphate and potash in the quarter. Mosaic s profits shot up around 62% year over year to $201.9 million or $0.54 per share in the reported quarter from $124.4 million or $0.29 a share a year ago. Barring one-time items, earnings per share were $0.56 per share, missing the Zacks Consensus Estimate of $0.59. Revenues rose roughly 18% year over year to $2,250.7 million on double-digit sales gains across phosphate and potash businesses, but lagged the Zacks Consensus Estimate of $2,313 million. Segment Highlights Revenues from Mosaic s larger Phosphate segment climbed around 21% year over year to $1.7 billion in the quarter on higher volumes and increased finished product prices. Average selling price rose around 6% to $461 per ton in the quarter from $436 per ton last year. The segment s gross margin jumped around 52% to $294 million, aided by higher pricing and volumes. Segment sales volumes went up roughly 22% year over year to 3.3 million tons. Potash division s sales rose around 13% year over year to $593 million in the quarter as a 15% fall in prices was more than offset by higher shipment volumes. Sales volumes jumped roughly 29% year over year to 1.8 million tons while selling price fell to $291 per ton from $342 per ton a year ago. Gross margin declined 29% year over year to $131 million, impacted by lower pricing. Financials Mosaic exited the quarter with cash and cash equivalents of roughly $3 billion, down 11% year over year. Long-term debt jumped nearly four-fold year over year to around $3.8 billion. Mosaic s capital expenditure was $188 million in the reported quarter. Operating cash flow was $489 million in the quarter compared with an outflow of $45 million a year ago. Mosaic repurchased 55.1 million shares worth $2.6 billion as of Oct 27, 2014. The company returned $469 million to its shareholders during the reported quarter. Equity Research MOS Page 5
Outlook Moving ahead, Mosaic envisions continued strong demand for phosphates and potash. Mosaic expects sales volume for its phosphates business to be between 2.5 million and 2.8 million tons in the fourth quarter compared with 3.4 million tons achieved a year ago. Average selling price for the quarter is expected to be in the band of $430 to $450 per ton. The segment s gross margin for the quarter is expected to be in the mid-teens percent. Operating rate is expected to be 70%-80%, reflecting the company s move to cut phosphate production due to higher costs. Mosaic expects sales volume from its potash business in the range of 2 million to 2.3 million tons in the fourth quarter versus 1.9 million tons a year ago. Average selling price for the quarter is expected in the range of $275 to $295 per ton. The segment s gross margin is expected to be in the mid 30% range. Operating rate has been forecast in the 85%-90% range. Mosaic remains focused on achieving $500 million in annual operating cost savings over the next five years. VALUATION Mosaic s current trailing 12-month earnings multiple is 18.4X, compared to the 53.6X average for the peer group and 18.3X for the S&P 500. Over the last five years, the company s shares have traded in a range of 9.6X to 45X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on the estimated earnings for 2015 and 2016. Our Outperform recommendation on the stock indicates that it will perform above the market. Our price target of $59 is based on 16.9x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low The Mosaic Company (MOS) 14.0 12.4 7.0 9.9 18.4 45.0 9.6 Industry Average 20.0 15.0 9.1 9.7 53.6 124.5 10.9 S&P 500 16.7 15.6 10.7 14.9 18.3 18.4 12.0 Yara International ASA (YARIY) 10.8 12.8 6.9 8.7 11.8 17.1 5.4 Agrium Inc. (AGU) 14.5 12.4 11.5 11.5 20.7 21.9 6.9 Potash Corp. of Saskatchewan, Inc. (POT) 16.4 15.2 7.4 12.9 19.0 32.2 11.1 CF Industries Holdings, Inc. (CF) 14.0 11.8 9.7 11.4 16.8 18.6 6.2 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA The Mosaic Company (MOS) 1.8 3.7 1.3 9.3 0.4 1.9 9.6 Industry Average 12.5 12.5 12.5 21.4 5.3 4.3 9.2 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research MOS Page 6
Earnings Surprise and Estimate Revision History Equity Research MOS Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of MOS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1128 companies covered: Outperform - 15.6%, Neutral - 75.1%, Underperform 8.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research MOS Page 8