Shareholders staying bullish on Mosaic

With the value of Mosaic Company's stock down nearly 80 percent since June, one might expect its shareholders to be irate about all the money they've lost.

After all, some $56 billion in shareholder wealth in the fertilizer giant has been wiped out since the company's stock hit an all-time high of $163.25 a share on June 18. It closed Friday at $33.66 a share.

But the mood at Mosaic's annual shareholders meeting, held Oct. 9 at a Radisson hotel across the street from its Plymouth headquarters, was reflective, with investors asking probing questions about global fertilizer demand. The only whiff of dissent came when an older shareholder asked why the company was paying for an executive to go to business school (disclosed on page 34 of Mosaic's proxy statement). No one mentioned the plunging stock price.

It somehow seemed fitting that the Mosaic meeting was held just down the hall from a conference on Transcendental Meditation. Both groups -- the Mosaic shareholders and the transcendentalists -- appeared in a trancelike state as they crossed paths in the hotel lobby. "Gee, I thought there would be more anger," said a perplexed Warren Poole, a retiree from St. Paul who owns 200 shares of Mosaic, as he left the meeting.

But it's hard to get angry with a company that just a week before the shareholders' meeting reported its net earnings had nearly tripled to $1.18 billion in the first quarter ended Aug. 30, from $305 million in the same quarter a year earlier. Indeed, some analysts argue that Mosaic's stock slide has more to do with the uncertainties surrounding the worldwide credit crunch than with the company's recent performance.

Worries have surfaced in recent weeks that the seizure in the world credit markets will spread to the agricultural sector, making it more difficult for farmers to obtain loans to fund their operations. On Oct. 1, U.S. Agriculture Secretary Ed Schafer told reporters that "there's a possibility that we certainly could see tight credit having an effect on agricultural production." Those words were enough to send a host of farm-related stocks, from tractor manufacturer Deere & Co. to Archer Daniels Midland Co., into a nosedive.

The next day, as it explained its earnings, which while up 284 percent to $2.65 per share fell short of analysts' expectations, shares of Mosaic plunged. The stock fell $28, or 41 percent -- its steepest one-day slide since going public in 2004. Mosaic also disclosed that day it would curb production of phosphates, a key ingredient for fertilizer that accounts for about 54 percent of Mosaic's sales.

Days later, a flurry of equity analysts rose to Mosaic's defense, arguing that the outlook for fertilizer demand hadn't changed enough to warrant the stock's recent drubbing.

Indeed, global supplies of potash, another major fertilizer ingredient produced by Mosaic, remain at historically low levels. What's more, back-to-back record harvests have barely affected overall grain supplies -- at their lowest levels since the 1970s. This should compel farmers to plant more corn, soybeans and wheat next spring, which should keep fertilizer prices high, agricultural experts said.

And while the credit drought threatens to hit the agricultural sector, it remains just that -- a threat. Many farmers rely on local banks and lending cooperatives that specialize in agricultural loans and are somewhat insulated from the troubles on Wall Street, said Darrel Good, a professor of agricultural economics at the University of Illinois.

Loan terms may have tightened on some loans, but "no one believes there's a major credit issue at the farm level," Good said

Ben Johnson of Morningstar points out that Mosaic, which is majority-owned by agribusiness and food giant Cargill Inc., has made substantial progress paying down its debt, which should help insulate the company during a credit crunch. The company recently prepaid $1 billion in long-term debt, and its debt-to-capital ratio now stands at a comfortable 19 percent, vs. 41 percent in November 2006, he noted.

"They have a rock-solid balance sheet and they're spewing off lots of cash," Johnson said.

However, the sustainability of current crop prices remains a concern with analysts who follow Mosaic. Crop prices have fallen sharply from their recent highs, and that could force farmers to curb their purchases of fertilizers this fall. (Farmers typically buy their fertilizer in the fall and apply it in the spring.) Corn futures for December delivery recently dipped to $3.71 a bushel; in June, they nearly touched $8 a bushel. Wheat has dropped 58 percent since reaching a record $13.50 a bushel on Feb. 27.

"Longer-term investors should keep in mind that as grain prices fall, demand tends to increase while U.S. farmers may decide to switch to other crops, reducing grain supply and demand for fertilizers," wrote Citigroup analyst Brian Yu in an Oct. 3 research note. Yu has a "buy" recommendation on the stock, though he recently lowered his full-year earnings estimate for the company to $11.65 a share from $14.97. He also cut his 12-month price target for the stock to $112 from $150.

Mosaic and a number of other large fertilizer companies worldwide have been sued in federal courts in Minneapolis and Chicago for conspiring to maintain artificially high prices for potash. Mosaic has denied any wrongdoing, and analysts seem to have largely ignored the complaints.

But with Mosaic's trading at just five times the company's previous year's earnings, the stock looks undervalued, Johnson said. That's less than half the average price-to-earnings multiple for the specialty chemicals sector. "This stock price is incredibly low by just about any measure you choose," Johnson said.

As for Poole, the retired investor from St. Paul, he's decided to hang on to his Mosaic shares -- for now. "I still haven't seen a hole in their story," he said. "After all, people aren't going to stop eating."

Chris Serres • 612-673-4308