MOS - Mosaic Will Likely Have Continued Demand

2023-04-18 08:38:01 ET

Summary

• The Mosaic Company has seen a drastic increase in revenues as a result of the higher demand for fertilizers as a whole.
• The outlook remains very positive and companies like The Mosaic Company will in my opinion continue to have a strong customer base to sell to.
• The balance sheet looks strong and cash flows are large enough to make a big dent in the long-term debt.

Investment Summary

The Mosaic Company ( MOS ) is a leading global provider of agricultural products and fertilizers. Their range of crop nutrients includes phosphate and potash fertilizers, which are produced and distributed by the company. Mosaic has a wide operational footprint, with mines, processing plants, and distribution facilities located across North and South America as well as Asia.

This well-established business model has netted the company some very impressive last few quarterly results as the demand for their products has skyrocketed as a result of the ongoing war in Ukraine. With revenues however estimated to start decreasing as the market gets saturated, I still see the company as a long-term addition given its sheer size and quality of it.

Market Catalyst

The outlook for the fertilizer market remains quite optimistic. There is still a strong demand for the product as it helps establish better and more reliable food sources with both higher yields and a lessened chance of crop losses. In a report by alliedmarketresearch they further reiterate this statement and estimate the global fertilizer market to grow around 3.55% CAGR between 2021 and 2030.

The demand comes as food scarcity continues to be a big issue and companies like MOS who provide a product that can help with that will continue to have a strong customer base to sell to for many years.

In the last earnings report by MOS, the management maintained an optimistic outlook -

“Strong agricultural commodity pricing trends are expected to drive a recovery in demand for fertilizers in 2023. Global demand for grain and oilseeds remains high while stock-to-use ratios are at the lowest point in more than 25 years. Food security concerns, rising biofuel consumption, and crop production headwinds suggest elevated crop prices will persist through 2023 and likely beyond. As a result, strong global fertilizer demand is expected in 2023 as growers seek to maximize yields”.

I don't think the same growth seen in 2022 will happen year over year. But I wouldn't be surprised if companies like MOS see too much demand and an increasing backlog of orders as people often realize too late how much they actually need a product sometimes.

Quarterly Result

The Mosaic Company had strong growth in 2022 as a result of the war in Ukraine exposing the need to create alternative food sources outside of Eastern Europe. Net sales increased from $12.4 billion in 2021 to $19.1 billion in 2022, an impressive 54% increase. Gross margin also increased significantly from $3.2 billion in 2021 to $5.8 billion in 2022, representing an 81% increase. The increase in margins is perhaps the best highlight in my opinion. Often companies struggle to both increase revenues and margins at the same time. but with the market share and the already established business of MOS they seemed to have been able to do so very efficiently.

Looking at the bottom line the company had an EPS of $10.06 per share in 2022 which is a big jump up from 2021 when it was $4.27 per share. This increase in profits from the company has also helped them in buying back a lot of shares, over 20 million reducing the outstanding shares by almost 7%. I think this really highlights the shareholder positive management in MOS. But the question arises if they will be able to keep those numbers up. In my opinion, I don't find it very likely. A shift towards building up a stronger cash position might be better actually. I think that could help hedge a lot against any turmoil in the market that could potentially impact margins.

Risks

Some of the risks facing The Mosaic Company could be a decrease in the commodity prices for corn, wheat, beans, or palm oil. The prices of these are very correlated to the demand for fertilizers as shown in the last annual meeting from the company.

I think that a shift in the prices of these commodities could impact the revenues of MOS negatively. If there is not a continued demand as the management expects there to be, the forward valuation might be overvalued and then investors are faced with holding a company with potentially a lot of downside risk.

What could cause these prices to go down is a saturation in the market as more companies rush to benefit from the elevated prices as a result of the war in Ukraine. But I also think that the strong financials of the company will be able to hedge them against this and obligations like debt shouldn't start to become an issue at all.

Valuation & Wrap Up

Looking at the valuation of MOS one can see it trading at a very low forward p/e of just under 7. But there might be a good reason for this as the forward multiple is increasing which means investors are expecting the revenues to take a hit in the coming few years. I think the worry of commodity prices is pricing this in and that demand won't stay as high as before.

But despite that, I think the company has a strong outlook and the potential to still generate value for shareholders. It might feel like buying at the peak of earnings, but I don't see a strong enough case for demand to dwindle. Food scarcity is not something you solve overnight and the war in Ukraine has exposed some of the cracks we have in our food supplies around the world. Causing commodity prices to spike as they become scarce.

Looking at the health of MOS I think they have been able to capitalize greatly from 2022 and help build up a strong cash position and maintain a manageable level of debt. Besides that, they have also placed a focus on returning value to shareholders which I think is just another reason for the company to be a long-term addition to a portfolio.

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