Street Ratings For Potash And Monsanto Overshadow Mosaic

 |  Includes: MON, MOS, POT
by: Takeover Analyst

The Street currently rates Potash (NYSE:POT) and Monsanto (NYSE:MON) both "buys" versus a "hold" for Mosaic (NYSE:MOS). Based on my review of the fundamentals and multiples, I find limited upside for all of the firms.

From a multiples perspective, Mosaic is the cheapest of the three. It trades at a respective 10.5x and 10.7x past and forward earnings with a dividend yield of 0.4% and a free cash flow yield of 3.7%. Potash and Monsanto trade at a respective 12.7x and 24.4x past earnings, but provide dividend yields that are around 100 bps higher.

Mosaic had strong results in the most recent quarter with international demand fueling momentum. Management repurchased $1.2B worth of shares from Cargill. Even still, the drawn out case over South Fort Meade has raised concerns over the company's ability to navigate disruptions.

Consensus estimates for Mosaic's EPS forecast are that it will grow by 9.3% to $4.82 in 2012 and then by $6.40 and 13.1% in the following two years. Assuming a multiple of 10.5x and a conservative 2013 EPS of $5.08, the rough intrinsic value of the stock is $53.34, implying that it is around fair value.

Monsanto, on the other hand, has expectations for faster growth. Consensus estimates for its EPS forecast that it will grow by 18.6% to $3.51 in 2012 and then by 16% and 15% in the following two years. According to management:

"The first quarter results we reported today reflect better-than-expected performance from our Latin American business. They also reflect some timing benefits from our Australian cotton business and some early positives from the U.S. These results were even better than our revised quarterly guidance of a month ago. With these strong results in hand and an additional month of data on our business outlook, it gives me the confidence to point to the upper end of our original EPS range for the full year, even at this early point in the season.

Before we go into the details of the financial results, let me place the first quarter in a more precise perspective. First, we are, of course, very pleased with our first quarter results, as they confirm our emerging opportunity from Latin America, especially in corn. Compared with last year, we grew ongoing EPS by $0.20 this quarter. This is strong growth at this early point, and it is consistent with our plan that considers delivering 60% of our full year gross profit growth from our international business."

Potash notably stands out with a poor close to the year. Fertilizer dealers cut back on inventories as a result of an uncertain macro outlook. With that said, the reductions in industry supply have well positioned the firm to outperform. Potash is best able to exploit this environment given its leading exposure to potash and nitrogen, as well as its 11M worth of capacity.

Consensus estimates for Potash's EPS forecast are that it will grow by 5.4% to $3.70 in 2012 and then by 4.6% and 3.4% in the following two years. Assuming a multiple of 12.5x and a conservative 2013 EPS of $3.79, the rough intrinsic value of the stock is $47.38, implying 6% upside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.