Has Mosaic Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Mosaic (NYSE: MOS  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Mosaic.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

10.2%

Fail

 

1-Year Revenue Growth > 12%

(2.8%)

Fail

Margins

Gross Margin > 35%

28.3%

Fail

 

Net Margin > 15%

17.4%

Pass

Balance Sheet

Debt to Equity < 50%

8.2%

Fail

 

Current Ratio > 1.3

3.90

Pass

Opportunities

Return on Equity > 15%

14.8%

Fail

Valuation

Normalized P/E < 20

14.80

Pass

Dividends

Current Yield > 2%

1.8%

Fail

 

5-Year Dividend Growth > 10%

38.0%*

Pass

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes. * 4-year growth rate.

Since we looked at Mosaic last year, the company has given back two of the five points it picked up between 2010 and 2011. Revenue has dropped, and the stock has roughly broken even over the past year.

Mosaic makes fertilizer, which has been a hot sector in recent years as crop prices have risen and farmers can afford to take measures like adding fertilizer to increase their yields. As major producers of potash and phosphates, Mosaic and PotashCorp (NYSE: POT  ) have both become household names among investors after rising from relative obscurity in the past decade.

But Mosaic has plenty of competition, and lately, its rivals have had a big competitive advantage. Agrium (NYSE: AGU  ) , which has diversified production that includes both potash and nitrogen-based fertilizers, has benefited greatly from the low cost of natural gas on the nitrogen side of its business. Similarly, CVR Partners (NYSE: UAN  ) and Terra Nitrogen (NYSE: TNH  ) have had their profits soar on strong fundamentals that have put Mosaic at a competitive disadvantage.

It's therefore not surprising to see Mosaic take a hit to its bottom line. Earlier this month, Mosaic reported somewhat disappointing earnings and revenue with drops of nearly 20%. China and India have cut their use of potash, and Mosaic has also seen some supply disruptions related to both plant closures and the U.S. drought making transportation down the Mississippi River more challenging.

For Mosaic to improve, it needs to take advantage of the coming demand for fertilizer among farmers as they try to bounce back from the drought. In addition, if China recovers from its recent economic slump, it could go a long way toward pushing Mosaic back up toward perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

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Fool contributor Dan Caplinger has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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