Potash Corporation Of Saskatchewan Vs. Mosaic Company - A Tie

 |  Includes: MOS, POT
by: Tradevestor

After I wrote my first two articles of the Stock A vs. Stock B series on Seeking Alpha, I asked the readers to pick the two (or more) stocks they would like to see compared in future articles. Seeking Alpha user "skwestorange" suggested I do Potash Corporation of Saskatchewan (NYSE:POT) vs. The Mosaic Company (NYSE:MOS).

I will go ahead and admit that I am not as competent in this industry (Specialty Chemicals) as I am with others like Technology or Staples. Hence, this article will focus mainly on the numbers and more tangible aspects of comparisons. I would love meaningful comments and discussions from the readers, especially ones who have/had positions in these two stocks. I hope this article gets me, and the other new entrants to this sector, started on the right note.

While I've been in and out of the agricultural chemical stock Terra Nitrogen Company (NYSE:TNH) for short term gains, POT and MOS caught my attention as strong possible names. Let's look at the pros and cons of both companies. POT, based in Saskatchewan, Canada is the world's largest potash producer, accounting for one fifth of the world's total potash supply. Mosaic, based in Plymouth, Minnesota is the world's largest producer of phosphate and second largest producer of potash.

Pros of POT:

Management: Potash's CEO Mr. William Doyle has been at the helm since 1999 and is one of the most respected figures in the industry with close to four decades of experience in the fertilizers industry, including about 22 years at Potash. A long standing management is one of the key aspects Warren Buffett looks for in his investments and POT would certainly get a point there.

Strategy: Potash follows the Just in Time (JIT) production strategy, made famous by Toyota (NYSE:TM). 70% of their cost is variable, tied directly to production volume. Hence, this strategy gives them a great control over their expenses.

Cons of POT:

Transportation Risks: Potash admitted in their 2010 annual letter that the lack of a solid distribution and transportation infrastructure at Saskatchewan is a potential risk. They might be exposed to external risk factors like strikes, which could lead to higher expenses and lower profits. After all, what's the point of producing all the potash in the world if you are not able to get it across to your clients on time?

Local Taxes: While I do not have first hand experience or knowledge about Canadian tax system, POT is subject to high federal, provincial, and resource taxes. So compared to a company like Mosaic, Potash shares more of its pie with Uncle Sam (or the Canadian equivalent)

Pros of MOS:

Esterhazy, Saskatchewan: Mosaic holds the largest potash mine in the world at Esterhazy, Saskatchewan, currently producing about 5.3 million metric tons per year (Mtpy). Mosaic's K1 and K2 expansion projects aim to increase the production to 7.1 Mtpy by 2017

Undervalued: Mosaic's book value per share is close to $27 while the stock currently trades around $55. That seems particularly undervalued when you compare it with Potash's $9 book value and $45 current price. Though I am not a huge fan of analyst's target price, the average 1 yr target price for MOS is $85, while POT has a tag of $55. The upside seems much more for Mosaic going by those two metrics.

Cons of MOS:

Lowest ROE: Mosaic's Return on Equity (ROE) of about 21% is the lowest amongst its peers. Potash boasts a double at 42% while CF industries (NYSE:CF) stand at 33%. Needless to say, a higher ROE means the firm is able to generate higher profit on the shareholder's equity.

Dividend: Though both firms are no where near even the average 2% yield on S&P 500 stocks, POT has a longer history of paying at least some dividend, even if it's tiny. Mosaic was founded in 2004 and started paying tiny dividends from 2008. With the capital expenses through projects like K1 and K2, it's safe to assume MOS will not be increasing the payout ratio or the dividend in the near future. It has maintained a flat 5 cent payment throughout.

My decision: I am going to cheat a bit here and say, I would pick both stocks - one for the long run and one for the short run. Longer run, I would pick Potash over Mosaic for two main reasons: the longevity of the company and management, and the higher return on equity. I've always been a fan of companies which have/had a solid well established leader like Steve Jobs and Mike Farrell. However, for short term gains, Mosaic seems to be the attractive bet with its lower PE, wider trading range and price targets.

Investors should also note that both POT and MOS are cyclical stocks and their earnings as well as share price fluctuate with the business cycle. But to sign off on a positive note, the fertilizer industry has a high barrier to entry. It would take a new firm about 7 years, based on industry average, to overcome the initial costs and be profitable.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MOS over the next 72 hours.