With the S&P 500 index hitting post coronavirus highs and coming within 3% of pre crash levels, Wall Street was a sea of green on Tuesday. But one company shone above all others and that was The Mosaic Company (NYSE: MOS)
, the world's leading producer of phosphate and potash fertilizers for the agriculture industry
The $6 billion, Florida based, company reported their Q2 earnings after Monday’s bell and was the catalyst for Tuesday’s jump. A strong beat on analyst expectation was enough to send the stock up a full 16% during the session and for it to close near the highs. While EPS was in the black, revenue was shown to contract 6% year on year which given the quarter that’s just passed, wasn’t so bad in the grand scheme of things. The company’s adjusted EBITDA margin was more than 20% higher than analysts expected and this surely helped with the bull case.
On top of that, management reported $814 million generated in free cash flow which was a significant jump, 58% to be exact, on the same quarter a year ago. The shrinking revenue was partly explained by falling potash prices, as Mosaic actually sold 18% more potash year on year for a quarterly record of 2.6 million metric tonnes. Management are bullish for the second half of 2020, noting that global inventories have been drawn down in the past 6 months and key fertilizer markets like Brazil and India are about to hit their peak application seasons. This should help to stabilize potash and phosphate prices if not drive them higher.
Strong Second Half Coming
As CEO Joc O’Rourke said on the call, “Mosaic delivered another solid quarter despite significantly lower phosphate prices and operating rates driven by weather conditions in North America, as well as regulatory changes in Brazil. Despite the challenging conditions, we continue to execute at a very high level across the company, which is reflected in well-controlled operating costs and continued increases in synergy realization at Mosaic Fertilizantes. Our results demonstrate the economic value of the much more efficient business that we have created.”
Bank of America is in their corner and were out with a double upgrade to Mosaic shares at the end of June. Analyst Steve Byrne noted at the time that “duties on phosphate imports from two key producing countries, Russia and Morocco, could cause an inflection in U.S. DAP pricing potentially by this fall or at least by spring 2021” which ties in with management’s expectations.
So from a high level, Mosaic certainly looks well-positioned to get through any continuing fallout from COVID-19. As a key component of the global food supply chain, their business model and products are crucial to the world’s food security. For all that, however, the company’s share price has been stuck in a down trend for much of the last decade.
Worth A Punt?
A post 2008 crash high of $90 was set in February 2011 but it’s been downhill since, with shares closing just above $15 on Tuesday. Granted, they’re up a full 140% from the lows of March so there’s clearly some momentum present but investors getting involved should be aware of the longer-term story. All the same, there’s probably an argument for being a bull in the short term at least, with a strong Q2 reported and a promising rest of the year ahead.
The recent rally has been supported by a solid uptrend that offers investors a place to work an entry or an exit if shares break down. As a first stopping off point, it’s not unreasonable to target the stock’s pre-COVID range of $18-22 which suggests upside of at least 20% from Tuesday’s closing prices.
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