Is Mosaic Co (MOS) Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Mosaic Co (NYSE:MOS) fit the bill? Let’s take a look at what its recent results tell us about its potential for future gains.

What we’re looking for
The graphs you’re about to see tell Mosaic Co (NYSE:MOS)’s story, and we’ll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let’s take a look at Mosaic Co (NYSE:MOS)’s key statistics:

MOS Total Return Price data by YCharts

Passing Criteria	Three-Year* Change	Grade
Revenue growth > 30%	47.6%	Pass
Improving profit margin	54.8%	Pass
Free cash flow growth > Net income growth	(32.8%) vs. 128.4%	Fail
Improving EPS	139.3%	Pass
Stock growth + 15% < EPS growth	(7.8%) vs. 139.3%	Pass

Source: YCharts. * Period begins at end of Q2 (May) 2010.

MOS Return on Equity data by YCharts

Passing Criteria	Three-Year* Change	Grade
Improving return on equity	48.8%	Pass
Declining debt to equity	(47.8%)	Pass
Dividend growth > 25%	400%	Pass
Free cash flow payout ratio < 50%	142.6%	Fail

Source: YCharts. * Period begins at end of Q2 (May) 2010.

How we got here and where we’re going
Mosaic Co (NYSE:MOS) puts together a really strong performance, earning seven out of nine passing grades and narrowly missing an eighth on the free cash flow comparison. Over the past three years, Mosaic Co (NYSE:MOS)’s falling free cash flow has evolved into its greatest fundamental challenge, and it may not be able to support current dividend payouts if the decline continues. Will Mosaic Co (NYSE:MOS) be able to move past this problem and rebound? Let’s dig a little deeper to find out.

Last year, Mosaic benefited from exclusive contracts with emerging-market buyers in China and India, leading to a big improvement in its strained international distribution relationships. However, the company is now having a hard time selling products to farmers in both countries due to declining prices of Potash Corp./Saskatchewan (USA) (NYSE:POT) and phosphate fertilizers. Weakening Indian rupees and reduced farm subsidies could continue to weigh heavily on agricultural chemical producers, particularly those, like Mosaic, that depend on potash sales. On the other hand, China has been subsidizing fertilizers to the point of overproduction, which hits Western potash producers from the other side. A terrible drought in the U.S. and dwindling sales from international markets could very well slow down Mosaic’s growth in the near future.