MOS - High Demand Should Keep Things Positive For The Mosaic Company

2024-01-08 06:33:37 ET

Summary

• The war in Ukraine has caused grain prices to soar, hurting poorer countries and companies worldwide.
• The Mosaic Company is well-positioned to benefit from higher grain prices and increased planting.
• MOS is a mining operation that produces phosphate and potash for fertilizer, with a strong presence in Brazil.
• The Company has engaged in substantial stock buybacks in recent years, a sign that the shares are affordable.

In general, the war in the Ukraine isn't benefiting anyone. It has been an ugly conflict with escalation constantly a danger, and with Ukraine being the former breadbasket of the Soviet Union, it made grain prices absolutely soar as exports ground to a fraction of their peak. This is a disaster for poorer countries forced to face higher prices and is also hurting the bottom line of a lot of companies the world over.

Today I'd like to look at one company in a position to capitalize on the higher prices and the higher planting that has resulted. The Mosaic Company (MOS) is a large maker of phosphate and potash for use in fertilizer, a leading seller in North America, and also in the all-important nutrient-consuming farmland of Brazil.

Along with China, India, and the United States, Brazil is one of the top four nutrient consumers in the world, and an eager consumer of the mixtures and high-density products marketed under the name Mosaic Fertilizantes. Its importance to Mosaic cannot be overstated.

Understanding Mosaic

For a strongly agriculture-centric play, it's weird to think that Mosaic is a mining operation, but that's exactly what they are. Three segments are used in reporting: phosphates, potash, and fertilizantes.

Fertilizantes, to clarify, is materially just the first two in South America. They make various combinations of phosphates and potash that are readily marketable to the all-important South American growers, and because that (particularly Brazil) is such a big part of their operation, they decided to list it separately.

Phosphate mining comes in great measure from Florida, though they also have sources in both Brazil, and with a 75% holding of Miski Mayo, they also get a fair bit out of Peru. Potash, on the other hand, is overwhelmingly a Canadian product, coming out of their holdings in Saskatchewan. Exports are overseen by the Canadian government.

With an eye toward boosting yields with good fertilizers, Mosaic is heavily dependent on demand from farmers. That's not a bad thing, as the wars in Eastern Europe have still driven prices higher in the West, and farmers wanting to take advantage of those prices want to maximize their crops in a given plot of land.

By the Numbers

(source: 10-Q from SEC)

Despite some juicy stock buybacks in recent years, Mosaic continues to have a large reserve of cash and equivalents, and a larger stockpile of inventory that is always in demand. The current ratio sits at 1.10, which underscores the recent expenditures, though substantial, are not putting Mosaic in any sort of difficulty.

The price book of 0.96 also shows that the company can be had at a discount to shareholder equity, always an attractive feature. This is especially true for a company that is enjoying high demand , and is raising its dividend payout .

Mosaic is putting a lot of its free cash flow into paying down its debt and buying back stock, and at the currently low market prices it's hard to blame them for wanting to reduce the common stock outstanding. Though this does prevent the cash flow from building them a huge war chest, it should be a move shareholders will appreciate for years to come as the stock rebounds.

The Risks

Even for a big company in a good industry, Mosaic comes with some risks. Their demand is based on crop prices and conditions in agriculture, so any big unforeseen changes in that could negatively impact the bottom line.

A more serious concern is whether or not their fertilizer can be applied. This depends heavily on the weather during the season when it is generally put on. If it's not effective for some reason, storms or whatnot, farmers aren't going to buy from Mosaic to use it. The hope is that historical planting patterns are such as to avoid the worst weather, but if there's one thing you can't totally predict, that's it.

Finally, chemical costs to turn mined products into usable fertilizer could be an issue, as rising costs could force them to raise prices but not help the bottom line. Moreover, shipping isn't always easy, and a delay in the shipment of those chemicals could mean a delay in the shipment of the final product.

The Big Success of 2022

(source: most recent 10-K and 10-Q, SEC)

Realistically, 2022 was a heck of a year for Mosaic. Demand was huge, margins were soaring and bottom line diluted EPS was over $10 per share. If they could just keep this up, we'd have a major winner on our hands.

That's not how the world works, of course, and 2023, the first three quarters anyway, saw crop prices start to settle and margins shrink back to previous levels. Still and all, they've had an EPS of $2.39 already, and if analyst projections of $3.35 pan out, we could look at Mosaic's PE ratio at a bit over 10, still safely in the value-friendly territory.

(source: most recent 10-K and 10-Q, SEC)

What I really love though is all the operating cash flow being generated. You'll notice most of 2022 and all of FY2023 (so far) have been burned through in investments and financing, which is to say stock buybacks. Trading below book though I really don't mind the heavy financing activities, and I think they could really pay off in the long run.

Expenditures always seem to approach the big operating cash flow year over year, and it's nice that Mosaic has that option instead of trying to finance those activities with more debt. Pre-2022 we saw big investment activities, whereas more recently it's going mostly into financing. These are in some ways unavoidable for the business, and so long as they don't threaten too much of the cash on hand, you won't hear me complaining.

Conclusion

With a PE just barely in double figures, and the price/book under 1, Mosaic falls neatly into the value company proposition. The fact that the dividends are rising and the company is buying back shares is just gravy.

Indeed, I think the share buyback is as good a case for Mosaic as you're likely to find. If the numbers are such that the company's management feels it's worth buying at these prices, who am I to argue?

That said, I think Mosaic is a buy-and-hold sort of stock, with a long-term timetable. 2022 was a special year, and they could well be once in a blue moon. When it comes, however, it sure can be sweet, and justify a lot of waiting.

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