Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Mosaic Co (MOS), Potash Corp./Saskatchewan (USA) (POT): This Potash Producer Is Ripe for a Breakout!

In many industries, companies differentiate their products as a means to attract customers and justify higher prices. However, in commodity industries, the product is uniform and the price is set by the market. Therefore, the only way for companies to differentiate themselves is by becoming the lowest-cost producer — thereby enabling the company to earn higher margins than its peers.

Mosaic Co (NYSE:MOS)

Potash producers sell a commodity product. Therefore, market leaders like Mosaic Co (NYSE:MOS), Potash Corp./Saskatchewan (USA) (NYSE:POT), and Intrepid Potash, Inc. (NYSE:IPI) strive to cut costs as low as possible while maximizing capacity to take advantage of excess demand.

As the chart below shows, some companies achieve this goal better than others. While PotashCorp and Intrepid Potash average 30% operating margins, Mosaic Co (NYSE:MOS)’s operating margin is a little more than half of that.

Part of this can be explained by a bad first-half of the last decade for Mosaic, when it struggled to turn a profit in a difficult environment. However, the difference in profitability is better explained by cost structure differences between the firms.

Key differences

Although Mosaic is a vertically-integrated potash producer — it owns several phosphate rock mines — the company operates at a cost disadvantage to its competitors.

For instance, Potash Corp./Saskatchewan (USA) (NYSE:POT)’s Canadian mines are some of the least expensive mines in the world — the production cost is simply much lower than other mines due to differences in quality. This enables the company to produce more potash at a lower cost than Mosaic, giving it higher profitability.

Meanwhile, Intrepid Potash gains a cost advantage due to its positioning in the United States. Although the company’s mines are not as conducive to low-cost production as Potash Corp./Saskatchewan (USA) (NYSE:POT)’s Canadian mines, the company pays lower royalty rates to landowners than is typical in Canada.

In addition, Intrepid is committed to producing a portion of its potash using solar evaporation to generate energy, thereby reducing its cost of production even further.

Mosaic Co (NYSE:MOS), on the other hand, does not enjoy any of the cost advantages that enable its competitors to earn 30%+ operating margins. However, the benefit of operating in a commodity industry is that each company can essentially play its own game; the price of potash is not greatly affected by any one company’s decisions, so all companies must accept the market price. How profitable one company is compared to its peers does not have a significant effect on its long-term viability. In fact, a lower-margin company like Mosaic may represent better upside because it has significant room for improvement.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.