Trying to Defend Mosaic 24 comments
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Editor's note: This article was originally mis-attributed to Michael Shedlock's authorship. We apologize for the error.
I did a very shoddy back of envelope analysis yesterday on Mosaic (MOS) in terms of cash flow and the ability to completely buy back all its shares ...
Only 68 more points down for Mosaic before it gets to zero. I think down from 6x earnings to 5, do we hear 4? Looking at their balance sheet last quarter they had $2 Billion in cash/equivalents versus $1.6B in debt - so net $400M. Their cash flow was $1 Billion in 1 quarter alone. With realized prices higher this past quarter than the previous they should generate even more than the $1 B in cash last quarter. This will allow them to reduce their debt significantly and be somewhere around $1.5B cash net of debt. And add at least $1B every quarter after for quite a long time. With a $30B market cap starting in 2009 they should be able to generate $5B in cash a year which in theory means they can buy back 1/6th of the company every year, and by 2015 be private ;)
See, unlike some companies losing 50% of value in one quarter, others actually have tremendous stories and huge cash flow - even if fertilizer prices drop 25% from here the cash flow will be immense. It has not mattered as hedge funds who are levered seem to sell at any price due to redemptions, but if this continues, either buyouts will happen or the companies will declare huge dividends and/or take themselves private. At some point valuation does matter again - there are real businesses out there - these are not just stock symbols for hedge funds to trade in manic nature.
It looks like an analyst agrees with me today (or is an avid blog reader). I keep saying some of these valuations are absurd, but the stocks just keep going down - it is truly amazing. I am now wondering if these companies will soon begin to trade lower then their cash on hand.
- Shares of Mosaic Co., the world's largest phosphate producer, jumped Tuesday, a day after a sharp selloff that left analysts relatively upbeat on the company's share price. The stock has lost about half its value since mid June.
- On Tuesday, analysts cited the Plymouth, Minn.-based company's attractive valuation. Soleil Securities analyst Mark Gulley estimates that Mosaic generates a robust free cash flow yield of about 16 percent. Free cash flow, or operating cash flow minus capital expenditures, measures a company's ability to generate cash and reward owners. It also is more difficult to manipulate than net income.
- Gulley also said that with shares trading at three times the company's earnings before income, taxes, depreciation and amortization, a buyout of the company could be paid for in three years.
- Citi Investment Research analyst Brian Yu reiterated his "Buy" rating on the shares and his "positive long-term position on the North American fertilizer market."
I don't have a copy of the report but I am wondering if the statement above means that, if a company bought Mosaic, the cash flow would literally pay for the entire bill in 3 years? Not sure.
Either way, in this new environment cash is king, so despite the relentless selling, we want companies that generate cash like mad - which the fertilizer companies will at this price of their products, or 20-40% lower. Again potash (the nutrient) has not budged one iota (yes, the other two nutrients show some signs of weakening, as some readers have pointed out - but not dropping 50-60% like the stock price).
Again, it is all relative. Much like people are running away from global growth stocks since their growth rates are falling from 60% year over year to potentially 20-30% year over year - that's still not all bad. Especially when they are running into stocks shrinking 15% a year, hoping to once again grow 10% a year.
But that's logic, and we don't use that around here anymore. I will look forward to tomorrow's earnings report and have hopes the company will take steps to defend its stock. Obviously the chart is a disaster and people will be shorting once it rebounds to a resistance level (and true to form we'll have to sell assuming the worst once we hit those levels - since the worst has come to fruition over and over since July 1)
Disclosure: Long Mosaic in fund and personal account
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This article has 24 comments:
The hedge funds and mutual fund redemptions are one issue and it's creating a great buying opportunity --- if you can handle the pain. I have no idea where the bottom is, but I do think both stocks are tremendous buys at this level.
The credit issue may be affecting a lot of companies in the space. Farmers need credit to buy seed, fertilizer, and machinery. We are all aware of the current situation, even if Washington has not done a good job explaining it or selling it to America. Perhaps someone should start to think about food shortages or the need to import food next year if the situation is not resolved in short order.
I enjoyed reading the article. Thanks.
Mosaic is the largest N.A. postash producer as long as Potash is only producing at low levels due to its strike. A recent analyst noted there was only 2 weeks production inventory left for shipping.
India is projecting it needs 6-7% more fertilizer due to yield falls for key crops this year. Canpotex still has to negotiate.
China, despite its positive spin on record crop production, will have to get to the table for potash soon. With Russia expanding crop acerage Uralkali will not be increasing exports soon, since domestic fertilizer demand will increase to meet the recently stated Russian objective of being one of the world's largest grain exporters in five years..
Mosaic is a long term bargain. When hedge fund share price mutiliation ends, or they begin to buy back in after fear subsides, then fertilizer stocks will rise quickly.
What may not be as obvious is that the downturn here may have been planned. I have found articles about the forced deleveraging but as I an not in NY the following is just a theory on my part... but one that makes a lot of sense. A group of smart hedge funds/big money may have purposefully sold at higher levels and shorted the stock to drive the price down. The result would be margin calls on overleveraged hedge funds and forced selling... which would drive the price lower and cause more forced selling... at which point the stocks would be further shorted... etc. etc. etc. Then you get bankruptcies (i.e. ala Ospraie) which cause fear and selling and more selling and the cycle goes on until some catalyst comes in (like the original bail-out proposal which bumped these stocks for a while... or the POT announcement of increasing buybacks etc. ) Ultimately the selling comes back on line and probably will until real money (i.e. cash) replaces the huge leveraging.
It's kind of like the short on currency in Asian countries in the 90s or the Soros/Rogers attack on the Pound in the early 90s (read about black Wednesday on Wikip).- when there is too much weakness for any reason the savvy and powerful smell blood. I think that many retail investors, including me, that knew nothing about all of this saw great companies whose earnings were likely largely resistant to the recession and have been unfortunate enough to be unwittingly involved in the war games of the rich and powerful.
Its like nothing I have ever seen before. Lesson learned. Still, in the long long run markets cannot be manipulated. Just ask Dow.
I'm beginning to believe that's the plan. Let Wall Street drive down the share price and buy back your own company on the cheap.
Let's see if MOS defends their share price and the shareholders. I have my doubts. They made over a billion dollars and reported record earnings. The price for their products is stable and in short supply. Very cheap stock, getting cheaper every day. Hmmm.
If we open around 55 the mkt cap will drop around 24.5 B
So very close ..but given 64% is already under the control of CARGILL a LBO say @$100 will need $ 15.7 B ....I really think the risk/reward is very low, but today what it means???
1. Share prices normally fall ahead of declines in the values of the underlying commodity. The price of Potash has yet to show significant weakness. I has risen from just under $200 to over $1000 in a very short time.
2. At present price levels, the sales price is well over marginal cost. Equilibrium prices are where marginal cost equals marginal revenue. I expect prices to fall to approximately $400/$450 on Potash before they bottom.
3. The kind of cash flows being generated are of such magnitude, that competition will enter the field to drive up capacity and reduce long term price expectation towards marginal cost. As new competition will have higher entry costs (they come in at replacement cost), MOS will still have a first mover advantage (i.e. marginal cost of new investors > MOS marginal cost).
4. After a significant reduction in potash price, you can expect the stocks to bottom while potash prices continue to fall. Cuts in production and cuts in capacity are other indicators that a bottom is near (i.e. a good time to buy shares in producers); but these become relevant only after price damage has been completed.
5. Normally, this is a nice defensive space to be in; after all food must be consumed, it is a necessity. The growth in China/India demand is the principal reason why analysts forecast price increases to a level closer to $1350 before they peak. The sad truth is that incremental demand from emerging markets is very price sensitive. India is growing, but enormously poor. Over half the population lives on less then $2 a day. When people buy grain they do not buy by the kilogram (based on physical need), they buy by the Rs (based on ability to pay). As prices rise, the amount consumed falls as a consequence of absolute poverty.
The hedge funds do seem to be divesting. I have no idea when they will stop. There are approx. 43 days to the next redemption cut off for hedge funds. They may continue to sell until near then. They probably all have a lot of Ag stocks. GS got into the act too by downgrading MOS. I am not sure there was a legitimate reason to do this. This smacks of GS manipulating the market again. They will make more money as call options are redeemed for nothing. Then they will buy a lot of calls themselves before the upgrade the stock. They are shameless. The fundamentals of MOS do not justify the GS downgrade. The TTM earnings are $6.49 (Yahoo finance). This puts the TTM PE at $46.60/$6.49 = 7.18. The last estimate for 2009 earnings for MOS was $13.99 on Yahoo finance. If you cut this to $12.00 due to phosphate weakness, you still get a PE of 3.88 for all of 2009. It hardly makes MOS a sell. Of course, GS may justify their position using the hedge fund divestiture reason. There is some validity to this. Still it smacks of market manipulation to me. I would be very surprised if GS is not making a lot of money playing this stock through its current swing downward. I am sure they will make more money playing it upward. They're sharp, but sometimes it seems that there ought to be a law!
this market is doomed ...we are in a DEPRESSION ..its horrible but true
Ah hegde funds,wouldn't life be great without them.They seemed like a good idea a few years back but now many invested in them are losing their asses.
So who did write it? The Easter Bunny? The leprauchauns?