A Fertilizer Company to Watch Out For

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.

Great performance
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.

Clean financials
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.

Value insights
Is Mosaic cheap when valued next to its peers? Let's take a look:

Company

Trailing P/E

Forward P/E

P/BV

Mosaic 12.6 8.9 1.9
Potash Corp 14.9 9.9 4.8
CF Industries 7.0 5.8 2.2
Agrium 9.3 7.1 1.8
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.

What's more, Mosaic has also bagged a coveted five-star ranking in our Motley Fool CAPS community. Make sure you add the stock to My Watchlist, our free, personalized stock-tracking service.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2011, at 3:43 PM, ALLWIN wrote:

    Neha, what is your comment on the statement by your fellow Fool TMF Ditty that Mosaic recent spending of $1.2 billion to buy shares at $54.58 was not the best use of cash, ie was "squandering of shareholders dollars.'

Add your comment.

DocumentId: 1738049, ~/Articles/ArticleHandler.aspx, 4/24/2014 11:46:55 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement