Is It Time To Give Up On Mosaic?

| About: The Mosaic (MOS)

Summary

‘Ugly-to-less-ugly’ situations are companies that have been hammered by trouble, digested the bad news, and are poised to run higher.

Mosaic has been rocked by the fertilizer supply glut. Shares now trade near their lowest price-to-book multiple in years.

Several triggers could lift shares. The stock is setting up to be one of the top turnaround plays of 2017.

Mosaic Corporation (NYSE:MOS) is out of favor with investors right now, but that might be about to change.

A supply glut hammered fertilizer prices. The company's stock price has traded down in lockstep, off nearly 50% from its all-time highs in 2014.

But there's light at the end of the tunnel. Several triggers could lift shares. The stock is setting up to be one of the more interesting turnaround plays of the New Year.

Let me explain…

Has Mosaic Finally Bottomed?

As regular readers know, my favorite investment setups are something I like to call 'ugly-to-less-ugly situations'.

These are companies that have been hammered by trouble, digested the bad news, and are poised to run higher. The bad times could be triggered by a recession, a natural disaster, or an industry wide downturn.

In these types of situations, the companies disappear from the press. Publishers know their readers don't want to hear about the idea. But in this 'ugly' state', you can often scoop up assets for a fraction of their real value. And when a piece of good news hits, these stocks often explode higher.

Case in point: Mosaic.

Mosaic has been rocked by the fertilizer supply glut. Last quarter, the company only squeezed out a $12 million profit, compared to earning $155 million during the same period last year. Shares now trade near their lowest price-to-book multiple in years. But while most investors are throwing in the towel, several trigger events could turn the stock around.

First, Mosaic is doing quite a bit to shape up operations.

In 2016, the company spent $304 million in selling, general and administrative costs. This figure was down from $361 million in 2015. Management is pushing to trim expenses further, which could provide a big boost to the bottom line.

Mosaic is also shifting to a low-cost model. The company closed its marginal mines and implemented strict expense controls over operations. Potash cash costs now come in at $74 per ton, the lowest since 2007.

"Mosaic's actions to optimize our potash production by closing high-cost facilities and aggressively managing costs are delivering results," President and CEO Joc O'Rourke wrote in the company's press release. "The actions we've taken to transform our business, combined with improving potash supply and demand dynamics, bode well for our business in 2017 and beyond."

This could allow the miner to boost profitability, even if prices don't rebound. In 2016, Mosaic squeezed out only a meager $0.49 profit per share. Analysts, though, expect that number to hit $0.93 next year. As we go deeper into 2017, the company is going to be up against some pretty easy to beat comparables from the previous year.

Second, we could be near a bottom in fertilizer prices.

Producers are finally starting to trim production. Last year, Potash Corp of Saskatchewan (NYSE:POT) reduced output at its Cory project, curtailed production at Lanigan, and mothballed its brand new Picadilly mine. BHP Billiton (NYSE:BHP) has also slashed spending on its massive Jansen potash project, opting to delay completion while prices are low.

None of this is to say a shortage is looming. Producers, though, are rationalizing high-cost projects. It might take some time, but the solution to low prices could be low prices.

Demand is also showing signs of a rebound. Weak food prices have crushed framers, sending incomes to their lowest level since 2009. Futures prices, however, have been quietly picking up in recent weeks. If these prices hold, farmers could spread more fertilizer on their fields to boost crop yields.

Of course, this thesis is hardly bulletproof.

After the dividend cut, you can no longer cite the big yield as a reason to own the stock. The massive K+S Canadian potash mine is on track for completion this fall, which will add a lot of supply to the market.

I'm not too worried, though.

Sure, the dividend cut is disappointing. The move, however, frees up cash flow and protects the balance sheet. The tough medicine today is the right call for long term investors.

K+S's mine is a problem, but the project isn't exactly a secret. Traders have had years to price new supplies into their prices. It's unlikely to trigger another wave of lower prices in 2017.

Bottom line on Mosaic

These are ugly times at Mosaic. You would throw your arm out reaching on that one to say otherwise.

That said, we don't need the situation to turn around completely. We just need things to go from ugly to a little less ugly. Even a bit of good news - a big mine gets shut down or food inflation picks up - and Mosaic shares could quickly rebound.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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