MOS - Mosaic: To Return All Free Cash Flow To Shareholders In 2023

2023-03-16 09:47:24 ET

Summary

• The Mosaic Company's balance sheet enters 2023 in a much stronger position than the prior year. Today, Mosaic's balance sheet is squeaky clean.
• Mosaic's capital allocation is going to be very strong in 2023. I estimate at least 10% of its market cap will return to shareholders in 2023.
• The blemish to the investment case is that fertilizer prices, namely potash, continue to slide.

Investment Thesis

The Mosaic Company ( MOS ) has seen its share price fall 40% from the highs of last year, with the last 10 days being particularly brutal, with its shares sliding more than 20%.

We can all look back and question whether that negative reaction was justified or not. That being said, rather than pontificate over theoretical considerations, I lay out an objective investment thesis for why these shares are undervalued.

My key argument here is that Mosaic makes substantial free cash flows and is going to return 10% of its market cap to shareholders this year.

What Happened in the Fertilizer Market?

In the past year, the bearish argument overhanging this sector was that farmers would push back against higher fertilizer prices. And I believe that now we can all agree, the bears got this right. So, what's next?

Global stocks-to-use ratios are at 25-year lows.

What the table above represents is that farmers are using significantly less fertilizer than normal. Or better put, the fertilizer percentage of use ratio has fallen below the 25-year low.

So, again, I ask, what's next?

I will not build my investment thesis on what should happen . That is outside of anyone's control. Let me instead focus on what is happening.

10% of Market Cap Coming Back to Shareholders in 2023

Before getting into Mosaic's capital allocation policy, let's momentarily turn our focus to Mosaic's balance sheet .

Mosaic's balance sheet has a net debt position of roughly $1.5 billion. And this figure gives no consideration to the $0.7 billion worth of marketable securities held as a long-term investment on Mosaic's balance sheet.

Consequently, given that Mosaic clearly makes more than this figure in free cash flows per year, Mosaic has sought to refinance its upcoming $900 million portion of its Senior Notes of 2013. Furthermore, note that Mosaic hasn't got any other significant meaningful maturity until 2028, which is really a paltry figure and hardly worth a mention.

In sum, Mosaic's balance sheet is now in a very strong position to return significant amounts of free cash flow.

Next, allow me to put figures into context.

In 2022, Mosaic opted to retire $550 million worth of debt. This year, Mosaic isn't going to retire any of its debt. That means that all else equal, Mosaic will have an additional $550 million to return to shareholders in 2023.

Given that Mosaic reiterated its intention to return all of its free cash flow to investors in 2023, that means that there's probably at least $1.5 billion worth of capital returning to shareholders this year via share repurchases and dividends.

How Should Investors Think About the Investment Case

I won't highlight platitudes such as the best time to invest is when there's blood on the street. Those considerations don't really help investors to navigate the financial downturn.

What it does do, is cause investors to buy when the macro environment is darkest hoping to get a rapid bump in their holdings once the macro environment stabilizes and the outlook becomes somewhat brighter.

I don't believe that is the right approach here. What I do believe is the right approach is to recognize that by buying right now and waiting for a year, investors will get 10% of their capital back via share repurchases and dividends.

Put another way, the message that I'm conveying is one of patience. Yes, stocks go down as well as up. And generally speaking, everyone is a long-term investor, particularly if the share price is going up.

But the time to get involved is when the stock is ''de-risked.'' Meaning that, getting involved right now, and staying with the investment, time is working in your favor.

The other strategy where one buys when things are grim, is still buying the same stock. But investors expectations are different. With that strategy, the investors is hoping to ''buy the dip and sell the rip.'' That strategy is certainly more exciting but it's not more profitable. That strategy is putting your emotions in the driver's seat, rather than putting reason and time at the front of the investment thesis.

The Bottom Line

My argument here is that fertilizer prices are sliding lower. But despite that consideration, or better said, including that consideration, I suspect that The Mosaic Company will be in a position to return at least $1.5 billion back to shareholders, or 10% of its market cap.

Incidentally, I should note that my $1.5 billion free cash flow figure is 25% lower than what analysts presently expect from The Mosaic Company. Thereby ensuring that my assertion carries an ample margin of safety.

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