The Mosaic Company (MOS, Financial) produces, blends and distributes crop nutrient and animal feed products. With 8,900 employees, this large-cap company operates in the basic materials sector.
Mosaic has been operating in a difficult environment, and the share price reflects the challenges as shares have sold off from around $55 to about $28 over the past 24 months.
At about $28, is now the time to consider buying Mosaic? Valuing a cyclical company can be tricky, and most would agree there is no one perfect method. So it seems prudent to assess valuation from a number of different perspectives to gain greater insight into the attractiveness of this investment candidate.
Historical averages
It makes sense to start with the guidance of Ben Graham, who suggested assessing fair valuation based upon the average earnings of a cyclical business over the past 10 years.
Using my handy F.A.S.T. Graphs subscription as a data source, the following 10-year averages can be calculated:
Operating cash flow
- Average operating cash flow per share = $3.54.
- Average price-to-operating cash flow multiple = 14.0X.
- Valuation based on historical operating cash flow = $49.56.
Cash flow
- Average cash flow per share = $4.90.
- Average price-to-cash flow multiple = 10.8X.
- Valuation based on historical cash flow = $52.92.
Operating earnings
- Average operating earnings per share = $2.92.
- Average price-to-operating-earnings multiple = 17.6X.
- Valuation based on historical operating earnings = $51.39.
Data Source: F.A.S.T. Graphs - All Rights Reserved www.fastgraphs.net
Another valuation perspective: Price-to-sales relationship
Another way to assess Mosaic is to review the historical norms for the price-to-sales (P/S) ratio. As the graph below demonstrates, Mosaic is currently priced at about historical lows for this relationship. This likely suggests fair or even undervaluation at current levels.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
Yet another perspective: Dividend yield
Dividend yield is another method to consider valuation. Again on this metric the data seems favorable for Mosaic. Assuming the current healthy dividend can be sustained (which is likely given the company’s favorable cash position and balance sheet strength), the dividend yield is well above historical norms.
Historical Graph - Copyright 2016, F.A.S.T. Graphs - All Rights Reserved
In a nutshell
Mosaic is tied to food consumption. It is reasonable to believe food will be in demand over the longer term. The trick then is to value the company appropriately given its cyclical performance. Since there is no perfect valuation model, multiple methods using averages over 10-year cycle periods can be used to objectively review the situation. And in this particular case, investors can patiently collect a dividend until normalized levels return.
Assuming that cash flows and historical multiples return to normal levels, for Mosaic it appears that the share price could see $50-plus in the future. (Note that ValueLine projects a price in the range of $50 to $70 over the 2019 to 2021 period as well).
For those reasons, Mosaic is likely undervalued and worth a look for longer-term, patient investors.
Disclosure: I am long Mosaic via shares and short puts.
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