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The Mosaic Company – A fertile buy/write opportunity.

October 13, 2009 | About:
Mosaic [NYSE:MOS] Oct. 13, 2009 $48.60

52-week range: $21.94 (Nov. 20, 2008) - $59.34 (May 20, 2009)


Mosaic, formed through the merger of IMC Global and Cargill's crop nutrition business, is a major global producer and distributor of crop nutrients. The company mines, processes, and distributes the three key fertilizer products- potash, phosphate, and nitrogen. Mosaic is #1 worldwide in phosphate and #2 in potash production. They also manufacture and distribute animal feed ingredients. The company serves customers in over 40 countries.


The commodities boom of late 2007 into early 2008 pushed operating margins to record levels in FY 2008 [FYs end May 31]. EPS surged to $4.38 and $4.28 in the past two fiscal years but the current year is expected to come in at only $2.80 /share.


Zacks expects a rebound to $4.44 in FY 2011. MOS was considered a great ‘weak dollar’ play being both an exporter and a commodity producer. As such their shares ratcheted up to $97.60 in late 2007 on the way to their all-time high of $163.30 in 2008.

At today’s quote of $48.60 this appears to be a good ‘cycle low’ entry point for long-term investors. The company recently pre-paid $1 billion in long-term debt leaving the balance sheet with no debt (net of cash on hand).


Dividends were initiated in 2008 and stand at $0.05 quarterly for a small, but well-covered current yield of 0.41%.


Cargill still owns about 64.2% of the outstanding shares from the contribution of their fertilizer operations at the company’s creation in 2004.


The high Beta @1.70 makes for exceptional option premium for those willing to sell calls and puts. This is where I see a great play.


Here is a good looking combination that makes sense to me right now…






Cash Outlay


Cash Inflow


Buy 1000 MOS @ $48.60 /share


$48,600




Sell 10 Jan. 2011 $45 calls @ $12.60 /sh.




$12,600


Sell 10 Jan. 2011 $45 puts @ $8.50 /sh.




$8,500


Net Cash Out-of-Pocket


$27,500






If Mosaic shares merely stay above $45 through the Jan. 21, 2011 expiration date:


· The $45 calls will be exercised.

· You will sell your shares for $45,000.

· The $45 puts will expire worthless.

· You will have received at least $250 in dividends.

· You will have no further option obligations.

· You will hold no shares and $45,250 in cash.




The bottom line:


If Mosaic shares go up, stay unchanged or even if they drop by as much as

$3.60 /share (-7.4%) you will end up with a net cash-on-cash profit of $17,750.




$17,750/$27,500 = 64.5% total return


achieved in about fifteen months.




What’s the downside?


If Mosaic shares finish below $45 on January 21, 2011:


· The $45 calls will expire worthless.

· The $45 puts will be exercised.

· You will be forced to buy another 1000 MOS shares.

· You will need to lay out an additional $45,000 in cash.

· You will have received at least $250 in dividends.

· You will end up with 2000 MOS shares and $250 cash.




What’s the break-even point on the whole trade?


On the original 1000 shares it’s their $48.60 purchase price less

the $12.60 /share call premium = $36.40 /share.




On the ‘put’ shares it’s the $45 strike price less the $8.50 /share

put premium = $36.50 /share.



Your overall break-even would be the average of those or $36.45 /share.


MOS shares could decline by as much as $12.15 share (-25%) from the

trade’s inception price without causing a loss.





Disclosure: Author is long MOS shares and short MOS options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 2.6/5 (5 votes)

Comments

dlight
Dlight - 4 years ago
Why buy the stock for 48,000 and then sell calls? Why not just sell 20 45 puts? In either strategy you have no upside exposure, the same downside risk, and you make the same if the puts expire worthless.

Plus you don't have to put out 48,000.
rharmelink
Rharmelink - 4 years ago
To give the 64.5% total return number some context, doing a similar strategy and similar method of calculations on SPY would have a total return of about 47.8%.

DescriptionOutflowInflow
Buy 500 SPY @ $108.08 / share$54,040
Sell 5 Dec 2010 $100 call @ $14.55 / share$7,275
Sell 5 Dec 2010 $100 put @ $8.45 / share$4,225
Net Cash Out-of-Pocket$42,540
Cash proceeds from exercised call$50,000
Dividends (2.18%)$1,374
Total Return47.8%
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago


Your math is wrong.

Assuming your prices are correct...

$42,540 less $1,374 in yield = $41,166 net outlay

$50,000 - $41,166 = $8,834 net profit

$8,734 / $41,166 = 21.46%
rharmelink
Rharmelink - 4 years ago
Again, apologies. I did err in double-counting the options, but you can't subtracts dividends from the initial outlay. They haven't been paid yet. But your comparison number would be closer than mine was.

I do think you need to give such comparison returns in your articles though. Otherwise, what is the reader supposed to compare the 64.5% return to? Is it good or bad, without something to compare it to? The average person would compare it relative to the average return expected from a B&H of a broad market index, which is misleading since your returns are partially leveraged with margin.

For example, if you did it as dlight[b][/b] suggested, your total return percentage would be much higher, assuming a 20% margin requirement. So, is the total return percentage meaningful if it can vary so easily and with no change in the absolute dollar amount put at risk? Or you could just reduce your original cash outlay by selling 20, 30, or 40 puts with the covered call -- driving the total return percentage up as well.

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