Shares of Mosaic (MOS) were rising more than 2.5% in afternoon trading, following an upgrade from J.P. Morgan.
Today, analyst Jeffrey Zekauskas raised his rating on the firm from Neutral to Overweight, and raised his target price to $68–more than 20% upside from the stock’s open.
Although the stock has fallen more than 28% in the past year, Zekauskas notes that the company’s position has markedly improved in recent months, and he also expanded his earnings estimates for 2013:
“MosaicÂs prospects have clearly improved since the beginning of the year. It resolved a long-standing dispute with Potash Corporation (POT) over 1.3 million tons of potash production that had been subject to a tolling agreement. It is now able to sell the disputed potash tonnage beginning in January 2013. The company also reached a settlement with the Sierra Club over permitting for mining phosphate rock at the large South Forte Meade mine in Florida, thereby lowering its purchased rock requirements and reducing its cost structure. China just settled a large potash contract this week with Canpotex and the other potash producers flat at $470 per ton cfr. The base case was that the contract would settle lower, leading to a stronger earnings outlook for Mosaic. Importantly, Mosaic is inexpensive on a replacement value basis. We believe that the replacement value of the company is approximately $92 per share, which represents a 65% premium from the current price of $56.27. Bidders for Mosaic after May 2013 would not be subject to tax penalty (stemming from the effects of a tax-free spin of Cargill-owned shares). We note that Potash Corp. received an unsuccessful hostile bid from BHP in 2009. It may be the case that MosaicÂs share price could be affected by the proximity of the May 2013 date, given MosaicÂs valuation. We raise our December 2012 price target for Mosaic from $57 to $68. Mosaic trades currently at 5.2x EV/EBITDA relative to Potash Corp at 6.6x for calendar 2013. Our target price for Mosaic reflects a 6.5x multiple of EBITDA relative to our 7.0x target for Potash Corp.
“We move our earnings estimate somewhat lower for F2012 (ends May 2012) and somewhat higher for F2013. Lower potash volumes and lower DAP prices are likely to weigh on results for the February and May 2012 quarters. We lower our 2012 earnings estimate from $4.90 to $4.75. We raise our F2013 EPS projection from $5.20 to $5.30 to reflect higher potash prices following the China contract potash settlement. We reduce our F2014 earnings from $6.40 to $6.00 to reflect a conservative approach to DAP earnings in the context of the MaÂaden phosphate capacity addition. We note, however, that should DAP prices hold at current levels, the company could earn $0.55 per share in F2013 above our forecasts.
“The company is in a $2.3 billion net cash position. We expect it to throw off 4% of its share price in free cash in calendar 2012 and 6% in calendar 2013. Its return on capital is 13-14%. Mosaic is constrained from repurchasing shares until May 2013 due to the tax-free spin of Cargill-owned Mosaic shares. We would expect a serious repurchase effort at that time.”
