Mosaic (NYSE:MOS): Upgraded to Positive from Neutral at Susquehanna

Susqueanna Agriculture analyst Don Carson is upgrading Mosaic (NYSE:MOS) to Positive from Neutral with a $87 price target (prev. unch).

Susquehanna expects that the removal of most of the uncertainty surrounding the Cargill overhang will shift investor focus back to Mosaic's strong fundamental outlook for FY11/FY12. With the $65 per share secondary pricing reflecting an EV/EBITDA multiple of 6.6x their CY11 estimates, a significant discount to the 9.5x multiple at which peer POT trades, they believe MOS shares offer investors compelling upside from current levels.

Compelling risk/reward. The $65 per share pricing of the secondary offering represents a 24% discount to the $85 price at which MOS shares traded when the Cargill divestiture was originally announced on January 18 versus a 14.7% decline for the group over the same time-frame. Mosaic's under-performance, in Susquehanna's view, was primarily due to the sizable Cargill overhang. With 64-73% of the 157 mln shares that are eligible for distribution in the first 15 months post the deal closing now placed, they expect investor focus will shift back to the strong grain and potash outlook, and the compelling value that MOS shares offer at current levels.

Even at lower phosphate multiples. On January 20, following the initial announcement of the Cargill divestiture, the firm lowered their rating to Neutral and their phosphate segment multiple to 7.0x their CY11 EBITDA estimate from 8.0x. At the time, the firm cited the sizable new capacity slated to come online in 2011-2015 in Saudi Arabia and Morocco, and their view that while they did not expect a major decline in DAP prices until 2013, that they expected a compression in MOS's multiple, particularly given that the earnings decline that they expected
would result from the new capacity coinciding with significant new MOS share issuance. At the current share price, the firm believes these risks are fully reflected in the stock. Considerable upside exists in MOS shares, even at lower phosphate multiples – Susquehanna notes that a further 2 point multiple reduction from 7.0x to 5.0x CY11 EBITDA still results in an $80 price target, or 23% upside.

Notablecalls: This looks like a solid call that should push MOS higher in the n-t.

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