Mosaic Stock: Top Reasons To Be Bullish (NYSE:MOS) | Seeking Alpha

Investment Thesis

Mosaic's (NYSE:MOS) share price left 2022 on the back foot. But I believe that 2023 is going to be a strong year for Mosaic.

There are several elements that will provide a tailwind to this space. There's a low stocks-to-grain ratio, with it hitting a 20-year low. Further, the impact of the Russian invasion has dramatically disrupted supply chains in Eastern Europe.

Meanwhile, despite this favorable backdrop for agriculture stocks, Mosaic is only priced at 5x this year's EPS.

Management clearly recognizes that the stock is cheaply valued and has raised its dividend by 33% y/y. This amounts to a 1.8% dividend yield. But this isn't the whole story.

There's a lot to be bullish about here, so let's get to it.

2022, Farmers Pushed Back Against Fertilizer Purchases

Before going into how 2023 is likely to shape up, let's momentarily discuss Mosaic's revenue for November.

In my article last month, I said:

[...] there's no doubt that the volumes of fertilizer being sold are coming down in 2022. We can debate all day about why farmers are pushing back, even as crop yields are so high and food inflation is now a global issue. But the facts are the facts, and farmers are pushing back.

Subsequent to that comment, Mosaic reported a few days ago these figures. Where you can see that fertilizer volumes are down y/y.

The most impacted fertilizer has been phosphates, where volumes are down just over 20% y/y.

So, again, we can discuss why 2022 should not have seen volumes come down. Or we can embrace reality.

On the other hand, consider the table that follows, showing Mosaic's revenues from its different segments.

You can see that revenues for both months are at $2.8 billion compared with $2.4 billion, an approximate 16% increase in revenues y/y.

While we don't have the final figures for December, I believe that, generally speaking, Mosaic's Q4 revenues are not performing badly.

That being said, this is contrary to analysts' estimates, which have been marked by a proclivity to downwardly revise Mosaic's near-term quarterly revenue estimates.

As you can see above, since Mosaic's last quarter results came out, analysts have been consistently downwardly revising Mosaic's revenue targets.

Looking Out to 2023, Destocking

Let's just be open and honest. Fertilizer stocks are out of favor.

And the reason why fertilizer companies are out of favor is that farmers pushed back against high prices in 2022. That meant that the volume of fertilizer coming out of Mosaic, and others in the sector was reduced y/y, which, by extension, weighed down investor sentiment towards the sector.

However, the dynamics that lead to the high prices in 2022 have not gone away.

Fertilizer prices are high due to, among other reasons, the logistical challenge in Eastern Europe and Russia, not to mention the pre-invasion sanctions for exporting fertilizer out of Belarus. Hence, I'm not solely referring to the direct impacts of the Ukrainian invasion. But also the indirect impacts affecting this region.

So, given all these brewing dynamics, farmers in the West are now embracing a period characterized by one word: destocking.

And this leads me to highlight the following graphic.

As you can see above, the stocks-to-grain ratio is at a 20-year low.

The stock-to-use ratio is an indication of where crop inventories are relative to fertilizer use. Put another way, it's a supply-demand relationship. When this ratio is down, it means that there's tight inventory. And there's a low supply of fertilizer.

So, this leads me to conclude that not only are fertilizers out of favor, as investors, in my opinion, over-emphasize the pushback from farmers in 2022, and extrapolate these dynamics many years into the future. But also, keep in mind that Mosaic's 2023 is still expected to be highly profitable as was 2022.

And this leads me to discuss its valuation.

MOS Stock Valuation - 5x 2023 EPS

Fertilizer companies are out of favor, as evidenced by both the graphic higher up in this note, plus the fact that MOS is priced at 5x this year's EPS.

While many companies in other spaces of the market are priced at 10x EPS, or 15x EPS, and often even higher for unprofitable companies, MOS is highly profitable.

So, we are really left with just one question, how profitable will 2023 be for Mosaic?

And here opinions diverge. For my part, I believe that 2023 can be a mirror image, with H1 2023 posting negative comparables with H1 2022, while H2 2023 will post strong positive comparables with H2 2022.

Yet, altogether, I suspect that 2023 will probably end up very similar to 2022.

The Bottom Line

In sum, there are three catalysts afoot.

There's a low fertilizer stocks-to-use ratio. There are logistics impacts and supply chain disruptions in Eastern Europe. And there's a highly profitable company that's cheaply valued at approximately 5x this year's EPS.

We all know this. And Mosaic's management knows this too. Consequently, I believe that Mosaic's management will probably look for more ways to return value to shareholders, such as through its recent 33% increase in dividends, now providing a 1.8% yield.