Option Trade 
Mosaic Co (NYSE:MOS) Puts 
Friday, October 27, 2017

** OPTION TRADE: Buy the MOS NOV 17 2017 21.000 PUT at approximately 0$.60. Place a pre-determined sell at $1.20.

Also include a protective stop loss of $0.25.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Mosaic Co (NYSE:MOS), a producer and marketer of concentrated phosphate and potash crop nutrients, will release its 3Q17 quarter earnings on October 31, 2017, before the market opens. The company is expected to report EPS (earnings per share) of $0.18, which would be a ~45% YoY (year-over-year) fall.

For 3Q17, Wall Street analysts are estimating a combined YoY sales fall of 2% for Mosaic—to $1.92 billion from $1.95 billion in 3Q16.

The company witnessed good demand and strong operational performance prior to the hurricane with profitability metrics tracking ahead of the third quarter guidance. Post the mayhem of Irma, Mosaic now expects roughly 250,000 to 350,000 tons of lower production in September. In addition to this, the damage to Mosaic's Bartow warehouse is anticipated to result in a loss of up to 400,000 tons of finished phosphate product.

Over the past year period, Mosaic has significantly underperformed the benchmark indexes, the S&P 500 (SPY) and the VanEck Vectors Agribusiness ETF (MOO). During this period, Mosaic has fallen 11.4% whilst the S&P 500 has returned 19.4%, and the Agribusiness ETF MOO has returned about 20.5%.

Among peer fertilizer stocks, Mosaic has been one of the worst performers so far this year, with a 26.6% loss YTD (year-to-date)

And, over the past three months, Mosaic's shares have lost 6.1%, underperforming the industry’s 21.8% gain.

Mosaic’s 50 day moving average is $28.32 and its 200-day moving average is $26.94. Mosaic has a 1-year low of $22.02 and a 1-year high of $31.54. The stock has a market cap of $10.22 billion, a PE ratio of 23.25 and a beta of 1.32.

Influencing Factors

Mosaic, in August, said that it expects phosphates sales volumes in the band of 2.2-2.5 million tons for the third quarter of 2017 compared with 2.5 million tons for the same quarter in 2016. Average selling price, FOB plant, is expected to be in the range of $310-$330 per ton. The segment gross margin rate is expected to be in the band of 7-9%.

Potash sales volumes have been forecast in the range of 1.9-2.2 million tons for the third quarter, compared with 2.2 million tons in the prior-year quarter. Average selling price, FOB plant, is expected in the band of $165-$180 per ton and the gross margin rate is anticipated to be in the band of 15-18%.

For 3Q17, analysts are estimating that Mosaic will report a gross margin of 10.5%, which would be similar to its trend over the past four quarters but just under the 11% we saw in 3Q16. The company is expected to report gross income of $201 million, which would be 5.6% lower YoY. Notably, its gross income is expected to fall much faster than its sales (2% decline) over the same period, indicating a higher cost of sales during 3Q17.

Mosaic is exposed to a difficult pricing environment. Lower pricing is hurting sales and margins in its phosphate business and is expected to remain a headwind in the third quarter. Mosaic also faces a challenging operating environment in the agriculture space.

Analysts and Hedge Funds Opinions

Mosaic Co. was downgraded by Zacks Investment Research from a “buy” rating to a “hold” rating in a report issued on Thursday.

According to Zacks, “Mosaic has modestly outperformed the Zacks categorized Fertilizers industry over the past three months. The company is gaining from its cost reduction measures, which is helping it to offset headwinds from depressed nutrient prices. Mosaic should also benefit from its efforts to boost production capacity and acquisitions. Moreover, the company will gain from improving global demand for fertilizers through the balance of 2016. Mosaic also sees a more stable operating environment in 2017 and envisions higher demand for both phosphate and potash. However, Mosaic faces a challenging operating environment in the agriculture space. Moreover, the company is exposed to a difficult pricing environment. Its phosphate and potash margins declined in the last reported quarter, hurt by lower prices. The company is also exposed to volatility in costs of key raw materials.”

Also, Mosaic‘s stock had its “hold” rating restated by investment analysts at Stifel Nicolaus in a research report issued on Thursday, October 12th. They presently have a $24.00 price objective on the basic materials company’s stock.

Several other analysts have also recently commented on the company…..

  • Credit Suisse Group AG reaffirmed a “sell” rating and issued a $21.00 price target on shares of Mosaic in a report on Wednesday, August 31st.
  • Vertical Research cut shares of Mosaic from a “hold” rating to a “sell” rating in a report on Wednesday, August 31st. They noted that the move was a valuation call.
  • Royal Bank Of Canada reissued a “sector perform” rating and set a $23.00 target price (down previously from $25.00) on shares of Mosaic Company (The) in a research note on Tuesday, August 8th.
  • Morgan Stanley cut their target price on Mosaic Company (The) from $27.00 to $25.00 and set an “equal weight” rating for the company in a research note on Monday, August 7th.
  • BidaskClub cut Mosaic Company (The) from a “sell” rating to a “strong sell” rating in a research note on Friday, August 11th.

Eleven research analysts have rated the stock with a sell rating, twelve have assigned a hold rating and two have assigned a buy rating to the company.

Harvey’s Options Volatility Indicator

Summary

Mosaic’s earnings have fallen YoY (year-over-year) due to negative revenue growth, which was primarily driven by falling fertilizer prices. Excess capacity has put downward pressure on fertilizer prices in recent years, and fertilizer players (MOO) have taken a hit.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the MOS NOV 17 2017 21.000 PUT at approximately 0$.60. Place a pre-determined sell at $1.20.

Also include a protective stop loss of $0.25.

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