Mosaic (MOS) Earnings Play

Folks, I am bullish on Ag names in general but unfortunately most of the unusual option activity in this space is coming in 2nd half of this year.  Here is a note from Credit Suisse regarding MOS:



"Favorable near-term fundamentals. The potash business is seeing robust volumes in North America as distributors prepare for the spring planting season. MOS has increased its operating rates and anticipates that producer inventories will fall to normal levels by the middle of the year. The phosphate market is seeing strong demand in North America and Asia, and DAP prices have surged in response to the extremely tight market. Producer inventories are expected to remain low through May although prices in North America are unlikely to move much higher as they have begun to see buyer resistance at current price levels. We are increasing our F3Q EPS from $0.57 to $0.64, and our F4Q EPS from $0.93 to $0.99 to reflect higher phosphate prices and higher potash volumes partially offset by rising sulfur costs.


Long-term strategic focus. Management focused on the benefits on having a balanced portfolio and believes that the phosphate market may be stronger than the potash market over the next few years. Supply from the upcoming
Ma’aden capacity will likely put pressure on phosphate prices but continued demand growth in the industry will eventually absorb the new supply. Meanwhile, management believes that the potash market may be hampered
by the large amount of planned brownfield capacity and the threat of new entrants.


Maintain Neutral on MOS. While MOS should see solid earnings over the next 1-2 quarters owing to strong potash volumes and robust phosphate prices, we believe the challenging medium-term outlook for phosphate owing to the looming Ma’aden capacity and a relatively fair valuation of 16.6X 2011 P/E and 9.4X 2011 EV/EBITDA may limit share upside over the next 12 mos." 

On a technical basis, the stock is trending within a very well defined converging triangle.  A break above or below this triangle could bring in volatility.  I am willing to bet the support line will hold which is currently around $58.50.  A break below that could take us to $55 quickly, but I doubt that's going to happen.  As such, I am doing the following bull put spread:

- Buy to open April $55 put
- Sell to open April $60 put

Just filled the order for $1.47 credit.  Note that this is a bit risky as we only have 60 cents cushion on the downside as the stock trades at $60.60.  It also doesn't meet the 5-10-20 test.  Keep small portion size relative to portfolio.

Good luck!