The Mosaic Company (NYSE:MOS) is one of the world's leading producers and marketers of concentrated phosphate and potash crop nutrients for the global agriculture industry. Like other basic materials companies, Mosaic has seen its shares declining significantly in the last few years due to lower prices of its products. However, according to the company, it sees stronger markets and anticipates better results in the second half of 2016. The company expects improved profitability to be driven by lower raw material costs, combined with an acceleration in shipment volumes in both phosphate and potash driving up operating rates and margins.
In my view, at the current price Mosaic's stock is an excellent investment opportunity for the long-term. The company has a compelling valuation, and its stock is trading below book value. Furthermore, Mosaic is paying a generous dividend currently yielding 4.0%. After reaching a bottom of $22.02 on February 2, MOS stock has already climbed 25%, and it is moving in a trading range between $25 to $30 in the last three months.
Since the beginning of the year, MOS stock is down 0.2% while the S&P 500 Index has increased 3.5%, and the Nasdaq Composite Index has lost 1.0%. Moreover, since the beginning of 2012, MOS stock has lost 45.4%. In this period, the S&P 500 Index has increased 68.2%, and the Nasdaq Composite Index has risen 90.3%.
MOS Daily Chart
MOS Weekly Chart
Chart: TradeStation Group, Inc.
On May 4, Mosaic Company reported its first quarter 2016 financial results, which met earnings-per-share expectations. The company posted net sales of $1,674 million for the period, surpassing the consensus estimate of $1,604 million. Mosaic has shown significant earnings per share surprise in its previous three-quarters, as shown in the table below.
Data: Yahoo Finance
In the report, Joc O'Rourke, President and Chief Executive Officer, said:
We are seeing the benefits of the actions we've taken to weather this down part of the cycle. While we expect profitability to improve in the second half of the year, we are making further adjustments to ensure Mosaic remains competitive in any environment.
Phosphate is the principal product of the company accounted for about 54% of net sales in the first quarter of 2016. Mosaic is the global second largest producer of phosphate. Phosphorus is an essential nutrient both as a part of several key plant structure compounds and as a catalyst in the conversion of numerous key biochemical reactions in plants. Phosphorus is noted primarily for its role in capturing and converting the sun's energy into useful plant compounds.
According to the company, its phosphate operating earnings were negatively impacted by lower phosphate prices and the typical lag in realizing the benefits of lower raw materials costs. The first quarter average phosphate selling price, FOB plant, was $355 per tonne, compared to $458 per tonne a year ago. Mosaic said that it expected conditions to improve during the second half of 2016, with global phosphate shipments accelerating and profitability improving.
Net sales in the Phosphates segment were $909 million for the first quarter of 2016, down from $1.2 billion last year, driven primarily by lower prices of finished product. Gross margin was $65 million, or 7% of net sales, compared to $222 million, or 19% of net sales, for the same period a year ago. However, the company expects the gross margin of the segment to climb to 15%-20% in the second half of the year, as shown in the chart below.
Source: Q2 2016 Presentation
Potash is the other product of the company. Mosaic is the global second largest producer of potash. Potassium is a primary essential macro-nutrient, and even though does not form part of the plant's structure, 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, the potash market was off to a slow start in 2016 with delayed buying activity, particularly in China and India. As a result, shipment volumes were at the low end of its expectations and the company operated its facilities at reduced rates. The first quarter average potash selling price, FOB plant, was $207 per tonne, down from $288 per tonne a year ago. The Potash segment's total sales volumes for the first quarter were 1.5 million tonnes, compared to 2.0 million tonnes a year ago. However, Mosaic said that it expects a more stable operating environment in the second half of 2016 as global demand drives an acceleration in shipments, increased operating rates, and price stabilization.
Mosaic has a solid balance sheet. At the end of the first quarter, the company had cash and cash equivalents of $1.1 billion and long-term debt of $3.8 billion. The total debt to equity ratio was low at 0.39. Cash flow provided by operating activities in the first quarter of 2016 was $266 million compared to $729 million in the prior year. Capital expenditures plus investments totaled $274 million in the quarter.
Dividend and Share Repurchase
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 high at 4.0%, and the payout ratio is only 40.9%. The current yield is historically high, which indicates that the stock is undervalued, according to some dividend assessment theories. In the first quarter the company completed a previously announced $75 million accelerated share repurchase.
MOS Dividend data by YCharts
MOS Dividend Yield (TTM) data by YCharts
Regarding its compelling valuation, MOS stock, in my opinion, is undervalued. The stock is trading below book value; price to book is only 0.98, and the price to cash flow is very low at 5.59 the lowest among all S&P 500 basic materials stocks. The trailing P/E is very low at 10.20, the second lowest among all S&P 500 basic materials stocks, and the forward P/E is at 17.31. The price to sales ratio is low at 1.16, and the Enterprise Value/EBITDA ratio is very low at 6.66, the second lowest among all S&P 500 basic materials stocks. According to James P. O'Shaughnessy, the Enterprise Value/EBITDA ratio is the best-performing single value factor. In his impressive book "What Works on Wall Street," Mr. O'Shaughnessy demonstrates that 46 years backtesting, from 1963 to 2009, have shown that companies with the lowest EV/EBITDA ratio have given the best return.
The 10 S&P 500 basic materials stocks with the lowest price to cash flow ratio
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
In my view, at the current price Mosaic's stock is an excellent investment opportunity for the long-term. According to the company, it sees stronger markets and anticipates better results in the second half of 2016. The company expects improved profitability to be driven by lower raw material costs, combined with an acceleration in shipment volumes in both phosphate and potash driving up operating rates and margins. Over the long run demand for fertilizers will rise driven by a combination of population growth and improved diets worldwide. Regarding its compelling valuation, MOS stock is undervalued, in my opinion. The stock is trading below book value, the price to cash flow is very low at 5.59 the lowest among all S&P 500 basic materials stocks, and the EV/EBITDA ratio is also very low at 6.66, the second lowest among all S&P 500 basic materials stocks. Moreover, the company generates strong cash flow and returns substantial capital to its shareholders by stock buyback and increasing dividend payments. While waiting for a significant rebound in the prices of phosphate and potash, investors can enjoy the generous dividend currently yielding 4.0% a year.
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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.