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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


May 31st 2013 Mosaic
NYSE Symbol: MOS
Industry: Fertilizer
Price as of 5/31: $60.82

Sell in May and go away didn't work this year unless you sold utilities, bonds, or any leverage bond or mortgage REIT. The Japanese market, Nikkei continues its' correction falling 12% in just one week. The US market is overdue for a 5% to 10% correction, but so far the pull backs have been brief. Even though the corrections have been brief, there is a rotation going on. Utilities and other interest rate sensitive sectors are under pressure. The defensive sectors have come under pressure which ironically is where you typically want to be in a correction. Techs have perked up as money has rotated into that sector. Industrials have also improved, but materials remain the worst performing sector this year. Interest rates are starting to back up due to the improving economy. Longer term, that's good news for cyclical stocks and cyclical sectors like materials. This week we'll highlight a material name in the fertilizer business. The stock of the week is Mosaic. Mosaic, the second-largest North American producer of potash, is a longer term winner due to global demographics. Besides an attractive valuation, Mosaic has a strong balance sheet, a constant takeover candidate and strong fundamentals. Former parent, Cargill is looking to sell more of their stake in the firm, freeing up Mosaic to use more of their excess cash for share buybacks and dividend hikes. Shareholders in Mosaic should be rewarded as global growth resumes.

Back in April, Mosaic reported strong third quarter earnings. Despite being a typical low quarter, Mosaic reported net income of $344.6M or 81 cents a share verse $273.3M or 64 cents a year earlier. Profit, excluding other one-time items and cost of an antitrust settlement, was 90 cents a share beating analysts' estimate of 88 cents per share. Sales increased 2.3% to $2.24B, trailing $2.3B as estimated by analysts. For the total operating earnings of $419M, the potash business unit contributed $216M and the phosphate business unit contributed $197M. For the quarter, the company generated $371M in operating cash flow and continues to maintain a strong cash position with $3.3B of cash on hand. Looking forward, commodity prices have declined modestly as futures markets recognize the potential for a large 2013 crop. However, the prices remain high relative to historical norms. For Potash, the shipments are expected to reach the higher end of the 55M-57M ton range. Demand has been boosted by the contracts with India and China, as well as the expectation for a strong spring planting season. The operating rate of potash mines is expected to increase in the next quarter with better-than-expected demand from China and India as well. The 3M tons of ongoing potash expansions are proceeding as planned. Shareholder should expect a solid next quarter with a possibility of record potash sales.

Mosaic's stock has been in a tight range for 2013. Currently the stock trades for 13.8 times earnings (competitors trade 17 times earnings), 2 times book, and 2.6 times sales. When the stock fell into the upper 50s, a board of director purchased 2,000 shares on April 3. Speculation of a takeover by bigger competitors has surfaced due to Mosaic's attractive valuation, but the CEO has downplayed that speculation. The balance sheet remains in great shape with nearly $2 billion in excess cash. Management is looking to negotiate with former parent, Cargill to sell more of their stake in Mosaic to free up the cash for dividend sand share buybacks. In the short run, Mosaic and the other materials may remain under pressure, but longer term Mosaic is well positioned due to demographics and their strong balance sheet.