Time To Consider Mosaic

| About: The Mosaic (MOS)

Summary

Mosaic delivered fourth-quarter and full-year 2015 financial results which beat EPS expectations by a big margin of $0.09 (20.5%).

Considering its compelling valuation, MOS' stock is undervalued. The stock is trading below book value, the trailing P/E is very low at 8.94, and the EV/EBITDA ratio is at 4.93.

The company generates strong free cash flow and returns substantial capital to its shareholders by stock buybacks and increasing dividend payments currently yielding 4.44%.

According to Portfolio123’s "All-Stars: Buffett" ranking system, MOS' stock is ranked fifth among all S&P 500 basic materials stocks.

The average target price of analysts is at $30.29, up 22.4% from its February 11 close price; however, in my opinion, shares could go higher.

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Yesterday, on February 11, Mosaic Company (NYSE:MOS) reported fourth-quarter and full-year 2015 financial results, which beat EPS expectations by a big margin of $0.09 (20.5%). The company posted revenue of $2,163.2 million for the period, surpassing the consensus estimate of $1,952 million. Mosaic has shown significant earnings per share surprise in its last three quarters, as shown in the table below.

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Data: Yahoo Finance

In the report, Joc O'Rourke, President and Chief Executive Officer, said:

Our fourth quarter results reflect the cyclicality and seasonality of our business. Our progress on cost savings initiatives and strategic investments has positioned Mosaic to optimize performance in the current macroeconomic environment. At the same time, our prudent balance sheet management allows us to take advantage of opportunities to create long-term value. Repurchasing shares at the bottom of the cycle is high on the priority list.

The Mosaic Company is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients for the global agriculture industry.

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Source: Citi's 2015 Basic Materials Conference Presentation

Phosphate

Phosphate is the principal product of the company. Mosaic is globally the second largest producer of phosphate. Phosphorus is an essential nutrient, both as a part of several key plant structure compounds and as a catalysis in the conversion of numerous key biochemical reactions in plants. Phosphorus is noted especially for its role in capturing and converting the sun's energy into useful plant compounds.

According to the company, lower prices in this period of seasonally weak demand and its related production curtailment, combined with a lag in realizing the benefits of lower raw materials costs, all negatively impacted margins during the fourth quarter. For 2016, Mosaic expects another record year for global phosphate shipments, with market dynamics indicating an attractive supply and demand balance.

Net sales in the Phosphates segment were $1.0 billion for the fourth quarter, down from $1.2 billion last year, driven by lower sales volumes and lower finished product prices. Gross margin was $121 million, or 12 percent of net sales, compared to $231 million, or 19 percent of net sales, for the same period a year ago. The year-over-year change in gross margin rate primarily reflects lower finished product selling prices and a lower operating rate, partially offset by lower realized ammonia and sulfur costs.

Source: Fourth Quarter 2015 Earnings Presentation

Potash

Potash is the other product of the company. Mosaic is the second largest global producer of potash. Potassium is a primary essential macro-nutrient, and even though does not form part of the plant's structure, it has a significant role for the developing of its basic functions, validating the quality of a crop, increasing post-crop life, improving the crop flavor, its amount in vitamins and its physical appearance.

According to Mosaic, its actions to optimize its potash production by closing high-cost facilities and aggressively managing costs are delivering results. High retailer inventories at the beginning of 2015, the volatility and devaluation of foreign currencies against the U.S. dollar, and additional industry production capacity put pressure on potash prices. The company expects a more stable operating environment in 2016 as a result of solid demand and recently announced supply adjustments.

Net sales in the Potash segment totaled $572 million for the fourth quarter, down from $763 million last year, driven by lower shipment volumes and a lower average price. Gross margin was $155 million, or 27 percent of net sales, compared to $327 million, or 43 percent of net sales a year ago. The year-over-year decrease in gross margin was driven by lower selling prices and volumes, a lower operating rate, partially offset by benefits from foreign currency and cost savings initiatives.

Source: Fourth Quarter 2015 Earnings Presentation

International Distribution

Net sales in the International Distribution segment were $605 million for the fourth quarter, up from $516 million last year, primarily as a result of increased volumes from the acquisition of Archer Daniels Midland's (NYSE:ADM) distribution business. Gross margin was $38 million, or six percent of net sales, compared to $41 million, or eight percent of net sales, for the same period a year ago.

Source: Fourth Quarter 2015 Earnings Presentation

I see robust growth prospects for the company, despite the recent weakness in demand from North America and Brazil. It is unlikely that the weak demand in these countries will continue in the long term. Over the long run, demand for fertilizers will rise, in my opinion, driven by a combination of population growth and improved diets worldwide. MOS has a good cost position, and it is a global leader in the production of phosphate and potash. In spite of the macroeconomic turmoil, Mosaic is expecting record phosphate demand and near record potash demand.

According to the company, the grain and oilseed supply and demand situation remains relatively balanced. Even after three consecutive huge harvests, and despite the severe price decline across other commodities, crop prices have been relatively stable. Unlike hard commodities, Mosaic does not see a structural imbalance in agriculture. Several factors are giving farmers around the globe to use fertilizers to maximize yield and revenue per acre. The price declines in fertilizers have led to high crop nutrient affordability. Farmers are experiencing lower energy costs. Currency valuations are providing tailwinds for non-U.S. growers, selling U.S. dollar price crops. Moreover, big harvests have withdrawn large amounts of nutrients from the soil which must be replenished. As a result, demand is expected to remain strong.

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Source: Citi's 2015 Basic Materials Conference Presentation

Valuation

Since the beginning of the year, MOS' stock is down 10.3% while the S&P 500 Index has decreased 10.5%, and the Nasdaq Composite Index has lost 14.8%. Moreover, since the beginning of 2012, MOS' stock has lost 50.9%. In this period, the S&P 500 Index has increased 45.4%, and the Nasdaq Composite Index has risen 63.8%. However, considering its compelling valuation and its leading position in the industry, the drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of analysts is at $30.29, up 22.4% from its February 11 close price; however, in my opinion, shares could go higher.

MOS Daily Chart

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Chart: TradeStation Group, Inc.

Considering its compelling valuation, MOS' stock, in my opinion, is undervalued. The stock is trading below book value; price to book is only 0.91, and the price to free cash flow is very low at 12.48. The trailing P/E is very low at 8.94, the fourth lowest among all S&P 500 basic materials stocks, and the forward P/E is also very low at 10.55. The price to sales ratio is very low at 0.96, and the Enterprise Value/EBITDA ratio is also very low at 4.93, the lowest among all S&P 500 basic materials stocks.

The 10 S&P 500 basic materials stocks with the lowest EV/EBITDA ratio

The 10 S&P 500 basic materials stocks with the lowest P/E ratio

Source: Portfolio123

Mosaic is paying dividends. In March 2015, the company's Board of Directors approved an increase in the annual dividend to $1.10 from $1.00 per share. The annual dividend yield is pretty high at 4.44%, and the payout ratio is only 31.7%. Mosaic repurchased approximately 15.6 million shares for an aggregate amount of $698 million during 2015. According to the company, repurchasing shares at the bottom of the cycle is high on its priority list.

MOS Dividend Chart

MOS Dividend data by YCharts

Ranking

According to Portfolio123's "All-Stars: Buffett" ranking system, MOS' stock is ranked fifth among all S&P 500 basic materials stocks. The "All-Stars: Buffett" ranking system is based on investing principles of the well-known investor Warren Buffett.

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The ranking system is quite complex, and it takes into account many factors like book value growth, operational P/E, price to book value, trailing P/E, price to tangible book value, price to cash flow and EPS stability, as shown in Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.

Summary

Mosaic delivered fourth-quarter and full-year 2015 financial results, which beat EPS expectations by a big margin of $0.09 (20.5%). The company posted revenue of $2,163.2 million for the period, surpassing the consensus estimate of $1,952 million. Mosaic has shown significant earnings per share surprise in its last three quarters. I see robust growth prospects for the company, despite the recent weakness in demand from North America and Brazil. It is unlikely that the weak demand in these countries will continue in the long term. Over the long run, demand for fertilizers will rise driven by a combination of population growth and improved diets worldwide. Considering its compelling valuation, MOS' stock is undervalued. The stock is trading below book value, the trailing P/E is very low at 8.94, and the EV/EBITDA ratio is also very low at 4.93, the lowest among all S&P 500 basic materials stocks. Moreover, the company generates strong free cash flow; the price-to-free-cash-flow ratio is very low at 12.48, and returns substantial capital to its shareholders by stock buyback and increasing dividend payments. According to the company, repurchasing shares at the bottom of the cycle is high on its priority list. In addition, according to Portfolio123's "All-Stars: Buffett" ranking system, MOS' stock is ranked fifth among all S&P 500 basic materials stocks. In my opinion, the drop in MOS' price creates an excellent opportunity to buy the stock at an attractive price. The average target price of analysts is at $30.29, up 22.4% from its February 11 close price; however, in my opinion, shares could go higher.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.