We recommend buying Mosaic (MOS) ahead of its Q3 2012 earnings release on Tuesday, Oct. 2, 2012, for a short-term speculative trade. Our bullish call is based on a combined assessment of what we believe to be useful predictive factors for earnings surprises and post-earnings stock price movements. These factors span key variables across valuation, analyst estimate trends, and technical strength.
Valuation -- Slightly Undervalued
We believe Mosaic to be fairly valued on an absolute basis and undervalued on a relative basis. On an absolute basis, based on consensus analyst estimates, Mosaic is valued with a 2013 P/E of 10.7 times and 2013 EV/revenue of 2.3 times, which we believe to be near fair value, given its projected 2013 EPS growth of 9%, and 2013 revenue growth of -1%. However, on a relative basis when compared to its publicly traded comparables, Mosaic is valued at a discount to Potash (POT) and Monsanto (MON) on both 2013 P/E and 2013 EV/revenue. While analysts expect Mosaic to grow slower than Potash and Monsanto, we believe the current valuation discount gap to be larger than warranted.
A summary analysis is presented below to highlight key valuation multiples, growth, and profitability metrics between Mosaic and its comparables:
Valuation Multiples
Market | Enterprise | P/2013 | P/2012 | EV/2013 | EV/2012 | |||
MOS | 24,942 | 22,182 | 10.7x | 11.7x | 2.3x | 2.3x | ||
POT | 37,816 | 41,475 | 11.7x | 13.0x | 4.7x | 5.0x | ||
MON | 48,813 | 49,163 | 21.0x | 24.6x | 3.4x | 3.6x |
Growth
Revenue | EPS | ||||||
FY13 | FY12 | FY11 | FY10 | FY13 | FY12 | ||
MOS | -1% | -13% | 12% | 47% | 9% | 12% | |
POT | 8% | -6% | 33% | 64% | 11% | -4% | |
MON | 7% | 15% | 13% | -10% | 17% | 26% | |
Profitability
Gross | EBIT | ||||||
FY11 | FY10 | FY09 | FY11 | FY10 | FY09 | ||
MOS | 27.8% | 31.4% | 25.1% | 23.5% | 26.8% | 18.8% | |
POT | 49.2% | 41.1% | 25.5% | 49.4% | 39.7% | 29.7% | |
MON | 51.4% | 48.3% | 57.5% | 21.2% | 15.3% | 26.2% | |
Source: Company filings, Yahoo Finance.
Analyst Estimate Trends -- Bearish
Current Analyst Estimates: Revenue estimates for Mosaic's current quarter range from $2.74 billion to $3.02 billion, with an average estimate of $2.88 billion (-6.6% from $3.08 billion in Q3 2011), while EPS estimates range from $1.05 to $1.27, with an average estimate of $1.15 in EPS (-1.7% vs. $1.17 in Q3 2011).
Current Quarter | ||
Revenue | EPS | |
Average | 2,880 | 1.15 |
Low | 2,740 | 1.05 |
High | 3,020 | 1.27 |
Year Ago | 3,083 | 1.17 |
% Growth | -6.6% | -1.7% |
EPS Surprise History -- Neutral
Mosaic has moderately beaten EPS estimates in two of the past four quarters, while moderately missing EPS estimates the other two quarters.
Q2 2012 | Q1 2012 | Q4 2011 | Q3 2011 | |
EPS Estimate | 1.17 | 0.76 | 1.30 | 1.27 |
EPS Actual | 1.19 | 0.72 | 1.40 | 1.17 |
% Surprise | 2% | -5% | 8% | -8% |
EPS Estimate Revisions -- Bearish
Recent analyst EPS estimate revisions have been bearish, with Q3 2012 EPS being revised down from $1.20 (90 days ago) to $1.16 (60 days ago), and further down to $1.15 (current).
FY13 | FY12 | Q4 2012 | Q3 2012 | |
Current | 5.46 | 5.03 | 1.33 | 1.15 |
7 Days Ago | 5.46 | 5.03 | 1.33 | 1.16 |
30 Days Ago | 5.46 | 5.03 | 1.33 | 1.16 |
60 Days Ago | 5.42 | 5.03 | 1.34 | 1.16 |
90 Days Ago | 5.21 | 5.03 | 1.35 | 1.20 |
Source: Yahoo Finance.
Technical Strength -- Bullish
We believe Mosaic's underlying technical strength, as measured by its historical share price performance, to be bullish with its longer-term moving averages and all MACD oscillators under bullish signals.
Moving Averages
- 20-Day Moving Average: Bearish
- 50-Day Moving Average: Bullish
- 100-Day Moving Average: Bullish
MACD
- 20- to 50-Day MACD Oscillator: Bullish
- 20- to 100-Day MACD Oscillator: Bullish
- 50- to 100-Day MACD Oscillator: Bullish
Disclaimer: Earnings Speculator is a trading advisory service designed to capture alpha by predicting post-earnings moves of stocks through a detailed analysis of key predictive factors. While our goal is to generate consistent alpha over time through employing a long-term positive probability edge in our predictions, the ultimate performance of any one of our individual stock recommendations is highly uncertain. We strongly recommend allocating no more than 2% of your trading portfolio to each of our recommendations in order to sufficiently diversify your risk and to be well positioned for long-term alpha generation through focusing on the prediction of post-earnings share price movements.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
