Since becoming a stocks investor, the experience I have found most valuable in preparing for the stock market, more than an economics degree, an international perspective, or study of conflict resolution and negotiating tactics, has been the years of hard labor I've put in managing my fantasy baseball team. Research based on the appropriate metrics, scouting the trade publications to find hot tips, ferreting out the analysts whose opinion is worth considering, and managing a balanced array of talent that on a day-to-day basis is about random odds to perform but that over the long haul will shine through (assuming the team has been assembled well), all this prepared me for navigating the stock market, whether directly or through mangled metaphor.
Avoiding irrational, emotional decision-making is another shared experience for fantasy baseball managers and investors. Last week, somebody in my fantasy baseball league traded Albert Pujols. Albert Pujols has been the best player in baseball for five years, a period in which the Pujols Trader has won the league four times. The trade included a fairly even two-for-two swap of other players, with Pujols as a throw-in. Pujols struggled through the first six weeks of the season after signing a huge contract with a new team, which came with a variety of pressures and professional adjustments (new league, new team, etc.), but the trade still came as a shock. In investing terms, this would be Warren Buffett selling two ordinary stocks, buying two other ordinary stocks, and giving away his shares of Apple (AAPL) because he was disgruntled by Apple's "mediocre" price movement the past three months (Yes, I know Buffett doesn't own Apple. Work with me).
Due to the Pujols Trader's reputation, everybody in the league blinked. Was he fooling us again? Did Pujols have a secret torn ACL, or a clandestine agreement to aid the CIA in hunting down terrorists in the Pakistani foothills that would cut his baseball career short? We couldn't believe that the Pujols Trader would give away the linchpin of his team. And yet, when he explained why he did it, PT's logic centered on one point: "But ultimately it comes down to Albert Pujols driving me insane." Irrationality made him do it.
Mosaic Company (MOS) has been a major position in one of my portfolios since I started managing it over a year ago. Since hitting a post-crisis peak share value of $88.57 in February of 2011, the fertilizer company has seen its stock hit a long downhill slide. Mosaic has positive analyst sentiment, strong management, and a good position to take advantage of the quite secular growth in world population and the subsequent need to increase food production going for it. It may not be the leader in the group - Potash (POT) is usually accorded this moniker - nor the best-performer over the past year - CF Industries (CF) has done better - but Mosaic is a well-respected S&P 500 (SPY) and Barron's 500 member. Selling now would be selling low, which is no good. The long term will only get better. This is no time to get hasty with Mosaic, one might say.
But ultimately it comes down to Mosaic driving me insane.
(Source: TDAmeritrade; click to enlarge)
Ok, it's not that bad. And irrational response to a sluggish stock price amidst a long-term story is no excuse for an investing strategy. Still, I need to free up some cash in that portfolio, and that time pressure has forced me to consider the irrational and dumping Mosaic for less than a reasonable exit price. In the process, my consideration has forced me to challenge a few standard beliefs about analyzing a stock. So let's look at Mosaic from the brink of irrationality, while trying to put the pieces back together.
Earnings: Absolute Growth or Trumping Estimates?
Mosaic's growth story has followed the trajectory of its peers in the fertilizer business: the numbers fell off a cliff after the crisis and returned in a big way in 2011. Mosaic has not climbed all the way back: Mosaic's 2011 revenue still lagged behind 2009 numbers, for example, though this year's revenue is on pace to set new highs (Mosaic's fiscal year ended May 31, and three quarters have already been reported). Mosaic is forecast to have better growth in earnings over the next two years than most of its peers, which suggests a more measured but consistent path of growth.
Earnings growth is a vital sign of health for a company, but beating earnings estimates has a bigger impact on the stock price. Stock prices incorporate expectations for a company's earnings growth, and so even if in absolute terms a company is growing, its stock might be held hostage to the expectations. It's in this latter area where Mosaic is more hit and miss.
Based on TD Ameritrade's statistics, Mosaic had a very weak fiscal 2010 and a very strong fiscal 2011 compared with analysts' estimates, missing three quarters and beating three quarters, respectively. In this fiscal year, Mosaic has had two misses and one beat. This is not a record of sterling performance, largely due to the unpredictability of the fertilizer market.
Analysts' estimates are not always rational, however, and it should be mentioned that Mosaic has been consistent in issuing quarterly guidance for prices and amount of both phosphate and potassium sold, as well as operational capacity. Over the past four quarters, Mosaic's results have fallen consistently within its prior-quarter guidance, with very mild exception. Management does appear to understand the short-term trends in the business and to know what's coming in terms of the company's results, which is reassuring. Also reassuring is that midway through its fourth quarter, Mosaic management affirmed that volume for potash and potassium will hit the high range of the company's prior guidance.
In an immediate results investing world, however, it gets hard to look past the red or green numbers that show up on the Seeking Alpha market current for each quarter's earnings. Mosaic's color diversity is part of what can drive shareholders crazy.
Cheap and with Growth?
Mosaic's valuation is reasonably attractive compared with peers and certainly attractive compared with the market:
(Sources: TD Ameritrade, WSJ)
As of Q1 2012 (or applicable quarter) | MOS | POT | CF | ||
Market Capitalization | $20.4B | $33.9B | $11.3B | $12.3B | $1.5B |
Quarterly Revenue Growth (Y-over-Y) | -1.10% | -19.53% | 30.15% | 24.79% | 6.92% |
Yearly Revenue Growth | 47% | 28% | 54% | 41% | 23% |
EPS Growth (Annual) | 34.78% | 79.50% | 103% | 105% | 46.37% |
Estimated Earnings Growth (next 3 years) | 8.86% | 3.54% | -3.90% | -0.75% | 14.86% |
Earnings 2011 | 4.37 | 3.51 | 22.97 | 9.81 | 1.27 |
Earnings 2012 (Est.) | 4.4 | 3.52 | 25.08 | 9.36 | 1.33 |
Earnings 2013 (Est.) | 5.11 | 3.81 | 20.81 | 9.39 | 1.66 |
Free Cash Flow/Share 2011 | 2.6 | 1.48 | 26.17 | 3.98 | 0.49 |
2011 P/E | 10.91 | 11.26 | 7.44 | 7.97 | 15.46 |
2012 P/E | 10.84 | 11.23 | 6.82 | 8.35 | 14.76 |
2013 P/E | 9.33 | 10.38 | 8.22 | 8.32 | 11.83 |
2011 P/FCF | 18.34 | 26.71 | 6.53 | 19.63 | 40.06 |
PEG Ratio | 1.23 | 3.18 | dd | dd | 1.04 |
Price as of May 31st close | 47.68 | 39.53 | 170.96 | 78.14 | 19.63 |
Dividend (Yield %) | .5 (1.04) | .56 (1.42) | 1.6 (.93) | .45 (.58) | NA |
Price Change past 12 months | -32.10% | -29.90% | 11.17% | -10.37% | -38.66% |
Mosaic is cheaper than Potash and IPI on P/E and Free Cash Flow basis. The company has stronger growth prospects than Potash, CF, or Agrium; the latter two especially look to be on the wrong end of the growth cycle based on analysts' numbers. Mosaic pays the second-best dividend in this group.
In spite of that, a couple things stand out more than normal for me, the burned investor. First, Mosaic's growth is mostly flat for 2012 and only supposed to come in 2013 and beyond. Considering Mosaic's erratic performance compared with estimates, that projected growth is hardly the surest bet. Beyond that, the price change for the past 12 months hurts. Not that Mosaic was alone, but then CF sticks out as the lone gainer in the group while still being much cheaper on a valuation basis. That makes it tougher to defend the stock.
(Source: Yahoo Finance; click to enlarge)
Isn't An Impregnable Cash Position and Balance Sheet Enough?
This is an aspect of the story that will brook no irrationality. Mosaic has significantly reduced its net debt over the past five years. The cash and cash equivalents have grown dramatically: Mosaic's cash ratio (cash/current liabilities) has gone from .26 in 2007 to 2.03 in 2011. Free cash flow has not grown as steadily, but it has been consistently positive and was quite strong last year compared with Mosaic's four prior years (only in 2008 did the company have a larger free cash flow).
No doubt partly as a result of that strong position, the company hiked its dividend 150% from a paltry $.20/share on an annual basis to a notable $.50/share. A one percent yield is not earth shattering, but the company has plenty of room to increase the dividend over the coming years if its cash flows stay up. Mosaic did pay a special dividend in 2009 of $1.30/share, so that possibility remains in the air. Dividend hikes are often viewed as an ultimate sign of confidence from management for its business, which leads to the last question.
Can the Long-Term Story Overcome the Short-Term Drag?
The key question is whether the short-term problems are a slump or a sea change, and whether the long-term will bring worthwhile returns or continued disappointment.
Management maintains a long-term positive outlook for the business but then again, that's why they're in management. Mosaic's management has done well in predicting quarterly results ahead of time, but the company has also had to cut production of phosphate (in December 2011) and then boost guidance to the upper half of prior stated guidance in April 2012. The market is very fluid, with commodity costs playing a large role.
Corn and soybean prices are directly related to Mosaic's price (the higher corn goes, the more farmers want to plant corn, the more farmers need fertilizer) and natural gas, as an input cost, hypothetically operates as an inverse to Mosaic's price. But Mosaic has struggled to hit margin estimates, suggesting either natural gas' low doesn't affect Mosaic as much as expected, or else that the stock already reflects this possible impact. With record production of corn in the U.S. forecast for this year, the pressure on corn prices may translate to continued pressure on Mosaic's stock.
Mosaic did just announce the signing of a deal for potash shipments to two large Indian customers at a price well above its guided range for potash sales, which is positive. Ultimately, Mosaic will likely make or break as a stock based on the company's success beyond North America, where roughly 3/5 of its sales are achieved.
Analysts, as mentioned, still believe in the company. Fifteen out of 21 analysts rate Mosaic a buy according to Wall Street Journal, and the other six rank the company as a hold. Target prices range from $55 to $78, with $66-$67 as the mean and median. The upside is as such forecast to be between 15-63.5%. Additionally, plenty of writers on Seeking Alpha feel confident in the company's prospects, which carries a little more weight than analyst opinion, at least around these parts.
Despite that, the irrational thoughts creep in. There is over a year of built-up frustration over Mosaic's gradual, more or less uninterrupted drop; its underperformance compared with the S&P 500, its peers, and earnings estimates; and concerns that the story might not unfold as planned. It's enough to drive a guy mad.
Patient Mosaic shareholders would be wise to hold onto their position. The company remains well-positioned, the dividend is a major positive sign, and whatever the global economic tumult does, it is unlikely to curb or significantly slow population growth rates and the subsequent need for food. In that setting, Mosaic is a reasonable hold, especially because the share price has gotten so low. Those who are considering getting into a fertilizer stock cheap might still consider CF, which is much cheaper and has performed much better.
And yet, in need of flexibility and frustrated, I'm still considering the less rational path. Maybe I should look back at the fantasy baseball analogy: since my league member traded away Pujols, the MVP has hit three home runs in a week and otherwise been on fire.
It might feel good to cut one's losses, but that doesn't make it rational, and it doesn't always make it right.
