Stock Analysis & Ideas

Will Mosaic Shares Reach All-Time High Amid Global Uncertainty?

Russia’s invasion of Ukraine has put global markets in jeopardy, leading to escalating food prices and growing inflation. It is projected that fertilizer markets, especially potash and nitrogen, will witness significant changes both in the short and long run.

The Mosaic Company (NYSE: MOS), the largest producer of potash and phosphate fertilizer in the U.S., is trading near its 5-year high at $58.19. Notably, MOS shares have already gained almost 90% over the past year.

Global fertiliser stocks including Mosaic, are likely to benefit from the ongoing agriculture momentum, supply chain issues in Belarusian potash, and the ongoing Russia-Ukraine conflict in the coming months.

Let’s delve deeper into these catalysts that may lead to further share price gains from current levels in the near term.

The Agricultural Momentum

Even before the Russia-Ukraine conflict started, global demand for all agricultural commodities remained near their all-time highs over the last two years, while stock-to-use ratios were at their lowest in over a decade. As a result, corn, beans, and wheat prices are already trading near their multi-year highs.

Both the agricultural and fertilizer market got a shot in the arm from the ongoing Russia-Ukraine conflict, further pushing prices higher.

Notably, Ukraine and Russia are major corn and wheat producers in the world and together account for 14% of global wheat production and 5% of global corn production.

Therefore, any major impact on crop production in Ukraine combined with sanctions on Russia may lead to another sharp jump in commodity prices due to supply constraints.

Likewise, robust agricultural commodity pricing trends are expected to continue to drive strong global fertilizer demand in FY2022.

Uncertainty on Belarusian/Russian exports of NPK

Global fertilizer markets are on the upswing, thanks to the added stimulus arising from the uncertainty around Belarusian/Russian exports of nitrogen, phosphorus, and potassium (NPK) resulting from the growing sanctions on these nations.

Belarusia and Russia together account for 35% of global potash capacity. Belarusian potash supply (17% of global supply) was already struggling, after Lithuania decided to block the main route that accounted for 90% of its exports. To find a way out, Belarus began diverting some volumes through Russia and also intended to build an export terminal in Russia to replace Lithuania.

However, growing sanctions against Russia could hinder both Belarusian and Russian access to markets across the world. Consequentially, companies like Mosaic are expected to tap the supply-demand gap by gradually adding capacity.

Meanwhile, NPK prices may remain volatile in the near term based on market volatility and lack of clarity on potential supply disruptions from the largest international competitors.

Tight Potash and Phosphates Markets in FY2022

Supply chain constraints, labor shortages, as well as other COVID-related challenges, have recently impacted global markets for both potash and phosphates.

The current global uncertainty heightened by the Russia – Ukraine crisis implies tight markets for both phosphates and potash through 2022.

Notably, record-high fertilizer prices witnessed in 2008 are still 60% ahead of current inflation-adjusted prices, implying there is ample room for price hikes in the coming months.

RBC Capital analyst Andrew Wong increased the 2022, 2023, and long-term Brazil potash price forecast to $869/ton, $700/ton, and $400/ton, from $675/ton, $350/ton, and $300/ton, respectively.

Mosaic’s Price and Volumes Outlook for FY2022

Concurrent with its earnings announcement on February 22, Mosaic stated that it forecasts upward pricing momentum to continue.

For Q1, the company expects FOB realized prices for phosphates to be more than $60 per ton higher than $676 reported in the prior quarter. Further, potash prices are projected to be more than $125 per ton higher than realized prices during the prior fourth quarter of $414.

In terms of volumes, Q1 Phosphate sales volumes are forecasted to be in the range of 1.6 to 1.8 million tons (versus 2.1 million tons in Q4), while potash sales volumes will range between 1.8 and 2.0 million tons (versus 1.8 million tons in Q4).

Wall Street’s Take

On March 7, Piper Sandler analyst Charles Neivert increased the price target on the Mosaic Company to $80 (37.5% upside potential) from $57.

Neivert predicts the ongoing Russia-Ukraine conflict to have long-term effects on the stock, and has made sizable hikes to his earnings before interest, taxes, depreciation and amortization (EBITDA) estimates for 2022 and 2023.

He commented, “Ag shares may be in the strongest position they have been in since 2007, when ethanol mandates first began to take hold which had a hand in determining the allocation of crop production and oil price became tied to corn prices…In an important distinction between the conditions marking the earlier ag peak and the current one, we see the current situation being far more sustainable since it carries multiple constructive influences.”

Commenting on expected rising prices going forward, he forecasts corn prices to cross $5/bu, wheat to hover around $7.25/bu, while soybeans will remain above $14/bu for an extended period. The analyst highlighted, “these prices may well become the norm.”

On March 6, RBC Capital analyst Andrew Wong also increased the price target on Mosaic to $80 from $65.

Given the current scenario, Wong believes that Mosaic has the highest potential upside among its peers based on higher relative leverage to potash and lower valuations.

The company’s valuation is based on an equal weighting to sum-of-the-parts enterprise value (SOTP EV)/EBITDA and discounted cash flow (DCF) analysis. The SOTP EV/EBITDA analysis applies a 7.0x multiple to 2025 EBITDA estimates for the Potash, Phosphate, and Fertilizantes segments, while the DCF analysis uses a 9% real discount rate.

The rest of the Wall Street community is cautiously optimistic about the stock, with a Moderate Buy consensus rating based on 6 Buys and 7 Holds. The average Mosaic Co price target of $57.67 implies that the shares are fairly valued at current levels.

Conclusion

While fertilizer stocks are at an all-time high, the long-term impact of the above-mentioned factors may still not be fully priced into the shares. Therefore, stocks like Mosaic could see higher highs in the days to come.

On top of this, the recently announced accelerated share repurchases and the annual dividend increase to $0.60 per share from $0.45 by Mosaic exuberates the confidence management has in the expected share price upswing, going forward.

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