In a controversial article here, I explained how Potash (POT) has a small amount of upside. I believe the upside is limited even more for Mosaic (MOS). In this article, I will run you though my DCF model of Mosaic and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to Potash and Huntsman (HUN). I recommend that investors steer away from Potash and Mosaic and back chemicals producer Huntsman.
First, let's begin with an assumption about revenues. Mosaic finished FY2011 with $9.9B in revenue, which represented a 47% gain off of the preceding year. Analysts model an 8% per annum growth rate over the next half decade, which is reasonable.
Moving on to the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I model cost of goods sold as 70% of revenue versus 3.7% for SG&A and 8% for capex. Taxes are estimated at 23% of adjusted EBIT (excluding non-cash depreciation charges to keep this a pure operating model).
We then need to subtract out net increases in working capital. I estimate this at around 1.7% of revenue over the projected period.
Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 9.5% yields a fair value figure of $57.02 - virtually in-line with the market value. All of this falls within the context of a challenging third quarter and the resolution of the South Fort Meade case. According to management:
"While we faced market headwinds during the third quarter, our accomplishments in this period reflect Mosaic's ongoing business strength and our great capacity for execution. We reached a settlement agreement with respect to our South Fort Meade permit litigation, which was approved by the courts yesterday, March 28. We expect to be at full production at South Fort Meade in the first fiscal quarter of 2013. Our investments to expand capacity at both Potash and MicroEssentials remain on track and on budget. Our operational excellence programs continue to bear fruit, with newly identified initiatives in Potash having already exceeded $60 million in potential benefits".
From a multiples perspective, Mosaic is also only decently positioned. It trades at a respective 11.9x and 11.2x past and forward earnings, versus 13.3x and 12.1x for Potash, and 15x and 7x for Huntsman. Assuming a multiple of 12x and a conservative 2013 EPS of $4.89, the rough intrinsic value of Mosaic's stock is $58.68 - again, in-line with my DCF result.
Consensus estimates for Potash's EPS forecast that it will hover from $3.51 to $3.98. Assuming a multiple of 12x and a conservative 2013 EPS of $3.85, the rough intrinsic value of the stock is $46.20. Estimates have recently gone done slightly, but I estimate that this will change given the company's strong diversification in key areas that could pick up (ie. nitrogen, phosphates).
Huntsman may be the riskiest investment due to its volatility; but, it is, in my view, the strongest investment. The company has more upside than the other firms. If the company's multiple plummets to 9.5x, and 2013 EPS turns out to be well below consensus at $2.11, the stock will explode 33.8% and outperform broader indexes. A lack of liquidity gives me pause, but this will ultimately help driver higher risk-adjusted returns when complemented with the beta of 2.2.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.