Continued: The Minnesota investor: Mosaic has the fertilizer for growth

Wall Street seems to have unearthed an improbable new glamour sector: fertilizer. The growth chart of Plymouth-based Mosaic Co. (MOS) -- the world's largest producer of fertilizers made from phosphate and potash -- looks like something out of the 1990s tech stock boom.

But the big difference is that Mosaic has earnings -- unlike many of the tech darlings of that bygone era. Those earnings have been climbing exponentially as the world's demand for grain increases.

Mosaic stock is selling for more than triple its price of a year ago. It closed Friday at $122.69, up about 225 percent from the $38 a share it fetched this time last year, but well off its mid-June peak price of $163.25. Mosaic was formed in 2004 through a merger of IMG Global Inc. and Cargill's crop nutrition business. Cargill still holds 55 percent of Mosaic's stock.

Mosaic's recent fourth-quarter earnings report should do nothing to dampen the market's enthusiasm for this little-known operation. Revenue for the year nearly doubled, from $5.77 billion to $9.81 billion, while earnings nearly quintupled, from 95 cents a share to $4.67. For the fourth quarter, revenue more than doubled, from $1.68 billion to $3.46 billion, while earnings quadrupled, from 46 cents a share to $1.93.

That growth is not expected to abate anytime soon, according to Mosaic CEO Jim Prokopanko. "The world's fertilizer demand should grow by 3 percent per year over the next decade. It had been about 1.5 percent over the past decade," he said.

Acquiring and producing additional potash and phosphate-based fertilizer is hard work. It's not like cranking up the assembly line to produce more widgets. "Fertilizer production is very labor-intensive," Prokopanko said. "Bringing on a new potash mine can take several years."

For instance, Mosaic is working on increasing its potash production in Saskatchewan, Canada, from about 10 million tons to more than 15 million tons. "That process will take us about 12 years and $3 billion," Prokopanko said.

Currently, every fertilizer manufacturer in the world is producing at full capacity, he said, so meeting the increasing demands will be a difficult and expensive process. For Mosaic, that means high costs to step up production, but it also means higher profit margins.

What is driving that increasing demand? Rising fuel prices and increased production of corn-based ethanol have been factors. But Prokopanko said ethanol plays a minor part. "Developing countries around the world are becoming more affluent, and as they do, their diets are improving as well," he said.

Rising global demand

Rapid economic growth in India, Pakistan, China, Southeast Asia and Latin America is increasing the demand for more and better food. "In China and India alone, about 1.1 billion people are expected to move from the lower class to the middle class in the next 20 years," Prokopanko said.

That increased affluence is having a direct effect on the demand for corn and other grains. "Instead of a rice and grain-based diet, people want more protein in their diet, which means more meat," he said.

It takes 3 pounds of corn to produce a pound of chicken, 4 pounds of corn for a pound of pork and 7 pounds of corn for a pound of beef, Prokopanko said. So as the demand for meat increases, it creates exponential growth in demand for grains. And that means more fertilizer.

"We've had four consecutive years of record grain production in the world and we still can't keep up with the demand," he said.

The rising cost of fuel and other commodities used to produce fertilizer also has contributed to the rise in prices. Sulfur has climbed from $55 a ton to more than $600 a ton in the past two years, while the price of natural gas has nearly quadrupled.

Mosaic and its competitors in the fertilizer industry are all searching for additional phosphate resources around the world, but it's a slow process. "As fast as we can pull it out of the ground and process it, we can sell it," Prokopanko said.

Mosaic generates about half of its revenue in North America. The company expects the percentage of revenue from elsewhere to increase significantly in the years ahead.

"We expect the biggest growth to come from China, Southeast Asia, India, Pakistan and Latin America," Prokopanko said.

Mosaic's optimistic forecast for continuing global growth should keep the stock price growing. Brian Yu, an analyst with Citigroup, foresees a target of $212 for Mosaic shares. "Investor sentiment remains positive, fundamentals appear sound and our farmer-economics analysis suggests additional room for Mosaic to raise pricing to drive earnings upside," Yu said.

Mosaic's recent price-earnings ratio of 28 is fairly high compared with the overall market, but fairly low for a company that has the type of earnings growth it has been experiencing. If the global demand for fertilizer continues to rise, Mosaic stock could smell pretty sweet for a long time to come.

Gene Walden is the author of more than 20 books about business and investing. He lives in the Twin Cities. Send questions or comments to: gwalden100@comcast.net, or visit Allstarstocks.com.