Phosphate And Potash Markets Will Face Tariff Risks And Recovery

Key Takeaways

• Overly optimistic production forecasts could lead to lower-than-expected revenues if phosphate and potash demand projections don't materialize.
  
• Overestimated efficiency gains and strategic project returns might strain profitability, with potential capital expenditure failing to generate sufficient earnings.
  
• Strong demand in phosphate and potash, agricultural market growth, and strategic cost and asset management position Mosaic for improved revenue and margins.

Catalysts

Through its subsidiaries, produces and markets concentrated phosphate and potash crop nutrients in the United States, Brazil, China, Canada, Paraguay, Argentina, Japan, Colombia, India, Australia, Peru, Mexico, Honduras, the Dominican Republic, Thailand, Indonesia, and internationally.

• The forecasts for production and demand might be overly optimistic, especially the anticipated improvements in phosphate production volumes and strong potash demand. This could result in revenues being significantly lower than expected if these projections do not materialize.
  
• There is a substantial risk that higher geopolitics-driven tariffs on Canadian potash could burden downstream customers, leading to reduced demand or declining margins if Mosaic fails to pass these costs down the supply chain.
  
• The continued currency volatility, with significant foreign exchange losses previously recognized, presents a sustained risk to the net income and earnings stability for foreign market operations, especially the Brazilian segment.
  
• The forecasted cost reductions and efficiency gains from optimization projects and production upgrades might be overestimated, leading to inconclusive impacts on net margins and potentially disappointing results compared to projections.
  
• Investment in and dependence on certain strategic projects like the Hydrofloat and BioPath products may not yield the expected returns, possibly resulting in capital expenditure that fails to generate proportionate earnings, thus straining overall profitability.

Mosaic Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mosaic compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mosaic's revenue will decrease by 0.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.6% today to 4.3% in 3 years time.
• The bearish analysts expect earnings to reach $475.0 million (and earnings per share of $1.49) by about April 2028, up from $174.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 22.7x on those 2028 earnings, down from 52.4x today. This future PE is greater than the current PE for the US Chemicals industry at 18.3x.
• Analysts expect the number of shares outstanding to decline by 1.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.71%, as per the Simply Wall St company report.

Mosaic Future Earnings Per Share Growth

Risks

• Mosaic's phosphate and potash businesses are well-positioned due to strong demand and limited supply, which may lead to continued elevated prices and improved revenue and margins.
  
• The company expects agriculture markets to improve, which could support Mosaic's earnings by driving higher demand for fertilizers as farmers strive to maximize yields in light of strengthened crop prices.
  
• Capital reallocation and shedding of noncore assets are strategically underway, potentially improving return on capital and impacting earnings positively by focusing on core business strengths.
  
• Cost discipline and ongoing reductions have started delivering results, with expectations to lower costs further and improve net margins by continuing these initiatives.
  
• The Brazilian segment, Mosaic Fertilizantes, demonstrates strong performance despite market headwinds, with the potential to further enhance margins and earnings by improving cost structures and diversifying customers.

Valuation

• The assumed bearish price target for Mosaic is $28.49, which represents one standard deviation below the consensus price target of $32.94. This valuation is based on what can be assumed as the expectations of Mosaic's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $44.0, and the most bearish reporting a price target of just $27.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $11.1 billion, earnings will come to $475.0 million, and it would be trading on a PE ratio of 22.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $28.93, the bearish analyst price target of $28.49 is 1.6% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.