Thursday, April 09, 2009

Mosaic (NYSE:MOS): Downgraded to Neutral at JP Morgan

JP Morgan is out lowering their rating on Mosaic (NYSE:MOS) to Neutral from Overweight while lowering tgt to $44 from $50.

According to the firm the downgrade is based a weaker earnings outlook and valuation issues. Mosaic has been a strong performer in 2009, outpacing both Potash Corp. and the S&P. Mosaic has climbed 32% and Potash 13% versus (9%) decline for the S&P 500 since December 31, 2008. Mosaic now trades at 6.8x EV/EBITDA for F2010 (ends August) versus 6.4x for Potash for F2009 (ends December). They note that Potash Corp, historically, has commanded a premium valuation on the basis of its higher financial returns. JP Morgan has reduced their Potash segment profit expectations sharply for F2009 based on lower forecasted volumes, and Phosphate margin forecast for F2010 based on narrower projected prices and margins leading to substantially lower earnings expectations for both years

Materially reduced EPS forecasts for Mosaic for F2009 and F2010. Lowered F4Q:09 EPS forecast from $1.18 to $0.29 and F2009 estimate from $5.00 to $4.20 largely because they decreased potash shipments for the fourth quarter from more than 2 million tons of product to 1 million tons. Potash shipments for Mosaic are running 29% below the previous year period and may reach a 37% decline by fiscal year end. The firm also reduced their F2010 EPS projection from $6.00 to $4.00 largely to reflect a lower DAP price forecast of $370 per ton versus $500 per ton previously

Firm prefers Potash Corp to Mosaic at this juncture. Mosaic has been a good absolute performer and an excellent relative performer in 2009, and they want now to take some money off of the table and reduce exposure to the fertilizer companies somewhat. Secondly, incremental demand data for potash continue to run lower than their expectations, raising the risks of negative price volatility in the event of a late or a poor settling of the Chinese potash contract. Finally, they prefer to own the equity with the greater potash leverage per share and a lower valuation, given that the performance of Potash Corp and Mosaic in the near-term probably rests on the level of the Chinese potash contract.

Notablecalls: Sensible call by JP Morgan's Specialty and Major Chemicals team, in my opinion. Won't do much damage to the stock price, though.

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