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I Will Stay Away From This Potash Stock

August 14, 2014 | About:
ovenerio

ovenerio

4 followers

In this article, let's take a look at The Mosaic Company (MOS), a $17.13 billion market cap company, which is one of the world's largest producers and marketers of concentrated phosphate and potash crop nutrients for the global agriculture industry.

A leader producer

We expect a scenario of growing demand for agricultural inputs so Mosaic, which is a leading producer of phosphate and potash, would benefit from this. The firm is the world's number-one producer of phosphate, with a 10% share globally, which is really impressive and is also a top-three producer of potash.

It is very important the predictability the company has for its fertilizer products in the Florida phosphate rock mines and prized Canadian potash assets.

Not all are good news, the company sells commodities in an industry that can be characterized from being volatile, and so it is affected by many exogenous factors that are out its control.

Big advantage

Considering that Mosaic (as well as other integrated players) mine their own rock, that is a huge advantage over other producers that must purchase in the market, especially during the periods of high rock prices.

Oligopoly

The potash industry is an oligopoly, which means that players maintained prices above marginal costs of production. There are only three Saskatchewan producers: Agrium, Potash Corp. and Mosaic.

The potash unit accounts for almost a third of sales but more than half of operating profit. The firm operates five mines in Canada and the U.S. Potash capacity totaled 10.7 million tons annually at the end of last year.

Future actions

The company plans to invest in both segments: phosphates and potash. In the phosphates segment, the company is focusing on trying to diversify its phosphate rock sources as well as expanding the value of the business, while keeping its position as one of the lowest-cost phosphate producers in the world. On the other hand, in the potash segment, it intends to grow by investing in brownfield expansions.

Dividends

Since 2008, Mosaic has a dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. The current dividend yield is 2% which is not considered good to protect purchasing power.

Return on Equity

Let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker

Company

ROE (%)

MOS

Mosaic

-25.71

AGU

Agrium

15.63

POT

Potash Corp.

18.54

Industry Median

8.14

The company has a negative current ROE which is not good. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at this, Agrium and Potash Corp. could be the options. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

1407985704935.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 31.3x, trading at a premium compared to an average of 25.2x for the industry. To use another metric, its price-to-book ratio of 1.55x indicates a discount versus the industry average of 1.69x while the price-to-sales ratio of 2.82x is above the industry average of 1.64x.

As we can see in the next chart, the stock price has an downward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $9,952, which represents a negative compound annual growth rate (CAGR).

1407985322572.png

Final comment

Mosaic has a promising outlook due to the increase in demand for fertilizers in the future, driven by the population growth and improved diets. However, the firm faces strong weaknesses like the poor ROE, its relative valuation and the negative CAGR. Moreover, the stock's dividends are not so huge to protect for increasing prices in the rest of the economy.

So, in this opportunity I would recommend that investors stay away from this stock and wait until the company´s performance improves.

Hedge fund gurus like Tom Gayner (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) sold or reduced their positions in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

Rating: 0.0/5 (0 votes)

Comments

PAT FINN
PAT FINN - 1 month ago

Hmm, seems most of weary of this potash play ..

makes me look longer and more close to make a move ..

ovenerio
Ovenerio premium member - 1 month ago

Yes, actually the more I look at the graphs and the valuation I feel more bearish

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