Mosaic (NYSE: MOS ) is making the most from the ongoing agriculture boom. With prices and demand for nutrients soaring, the fertilizer maker's revenues and net profits have also gone up. Mosaic's outstanding first-quarter numbers have encouraged me to take a closer look at the company.
Surging crop prices and an uptick in global farming activity have ramped up demand for Mosaic's fertilizers. Moreover, prices of nutrients have also shot through the roof in the past few months, adding to Mosaic's top line. This is no fluke, considering how Mosaic's revenue has grown at a solid rate of 44.6% in the past 12 months.
The fact that the compounded average growth rate was just 15.9% over the past five years also gives us a good idea of how solidly the agriculture sector has grown recently.
What's really astounding is the awesome turnaround in Mosaic's bottom line. From posting losses, Mosaic's net income has grown at a whopping rate of 167.8% in the past 12 months.
Strong eye on growth
Mosaic's growth plans appear to be on track. The biggest project under way currently is its potash expansion program, aimed at additional annual capacity of almost 5 million tonnes by 2020. Around 200,000 tonnes are expected to be added toward that total this year, along with another 700,000 tonnes by 2013. This potash expansion forms a major chunk of Mosaic's capital expenditure now.
Mosaic also recently introduced Nexfos, its first new feed phosphate product in 40 years, in yet another indication of the company's drive to expand all its segments.
Two powers in Mosaic's hand
Since Mosaic is a part of the three-member legal cartel that handles Saskatchewan potash exports along with Agrium (NYSE: AGU ) and PotashCorp (NYSE: POT ) , it has a huge advantage to play on. Through this cartel, Mosaic can easily lock in a part of sales for the future.
For instance, in August this year, India, one of the world's biggest potash markets, agreed to import potash at the prevailing high prices -- a deal that continues into 2012. As a part of this agreement, Mosaic is ensured of a part of its revenues for the forthcoming quarters. Mosaic also has similar high-priced export contracts of phosphate to India.
What's also working well for Mosaic is the way the fertilizer industry is booming. And with biggies like CF Industries (NYSE: CF ) remaining highly bullish on farming activity for next year, happy days should linger on for Mosaic.
Mosaic is sitting on a huge pile of cash with very little debt in hand. Its total debt-to-equity ratio is extremely low at 6.7%, and its cash and equivalents and unlevered free cash flow stood at $4 billion and $1 billion, respectively, as of Aug. 31. The great part is, while the company has reduced debt over the years, its war chest has grown steadily at the same time.
While low levels of leverage suggest that the company is financially sound, it also indicates how Mosaic might not be using the opportunity to grow its business and improve its return on equity with higher leverage.
Moreover, Mosaic's dividend yield of 0.4% appears too meager considering its strong cash balances and low debt levels. Though Mosaic is shelling out $1.2 billion to buy shares owned by trusts related to former parent company Cargill, I hope it starts using cash to boost dividends, too.
Is Mosaic cheap when valued next to its peers? Let's take a look:
|Terra Nitrogen (NYSE: TNH )||10.4||NA||12.2|
|Intrepid Potash (NYSE: IPI )||17.9||13.8||2.1|
Source: S&P Capital IQ. NA= not applicable.
Mosaic seems to be in line with its peers on a trailing P/E basis. But it's worth noting the fall in its forward P/E -- an indication of how the company's earnings are expected to grow in the future -- hinting at good potential upside down the road. The stock is also trading at 1.9 times its book value, which is at the lower end compared with its peers, suggesting that the company could still unlock value.
Adding to the good news are the balance sheet and solid growth plans. Mosaic's return on equity is good, too, at 25.8%. The only thing that might not impress you is its low dividend yield. Otherwise, Mosaic looks like a great stock for investment.
The Foolish bottom line
Mosaic is looking good on all fronts, and the strong industry conditions further add to my bullishness here. With the stock down nearly 30% in three months, it's looking like a good bet.