Mosaic [NYSE:MOS - $57.99] The Mosaic Company (Mosaic) is a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. They operate through three business segments: Phosphates, Potash and Offshore. The Phosphates division produces crop nutrients and animal feed ingredients. The Potash segment mines and processes potash in Canada and the United States. The Offshore segment produces and markets phosphate, potash and nitrogen-based crop nutrients and animal feed ingredients. The Company serves customers in more than 40 countries. As of May 31, 2009, Cargill, Incorporated owned approximately 64.3% of the Company’s outstanding common stock.
EPS in the recently reported fiscal Q3 (ended February 28) were $0.50 versus $0.18 – a big improvement year-over-year but somewhat below the $0.67 analyst estimate. Mosaic shares dropped from $63.80 on March 12th to close at $57.99 on April 5th.
Earnings comparisons going forward will continue to look good as the weak results from FY 2009 are replaced by the recovery mode numbers. Current estimates for the FY ending May 31, 2010 and 2011 are now running about $2.18 and $4.00 although earnings predictability for this industry is not high.
Mosaic is really a long-term play on the worldwide agricultural market. It can benefit from both increased commodity pricing as well as a weakening dollar. I also see it as a future inflation hedge as their raw material holdings can be marked to market upwards if large price increases take hold due to the world’s distrust in financial currencies.
Mosaic was formed in January of 2004 through the combination of Cargill’s fertilizer operations with those of IMC Global. Cargill continues to be the majority owner after assuming 66.5% of the outstanding shares in the merger.
Here are Mosaic’s per share numbers (excluding non-recurring items) as reported by Value Line:
Earnings are very levered to volume and can shoot up quickly when conditions are favorable as can be seen in the data from FY 2007 and FY 2008. With expected EPS of about $4 for the year ending May of 2011 the forward multiple is just 14.5x. That’s about as low as this stock has seen since the combination with IMC Global.
MOS shares peaked at $163.30 in mid-2008 as commodity prices surged only to fall back to $21.90 in the late 2008 market meld-down. I was a buyer back then and continue to hold now at $57.99/share.
Value Line and others see normalized 3 – 5 year earnings power of about $4.50 /share. Even a 15.5 multiple on those EPS would bring MOS back to about $70. That would be a fraction of its 2007 – 2008 highs of $97.60 and $163 but well above today’s quote.
The high volatility of these shares (Beta = 1.7) make them ideal underlying shares for option sellers who believe in the long-term story. Here are some pretty conservative LEAP options that make sense to me for those who’d be willing to own MOS shares at price points below yesterday’s closing price.
In every case illustrated above the puts will expire worthless on their respective expiration dates if MOS shares:
· Go up.
· Remain unchanged.
· Decline to no lower than the strike price you choose to write (sell).
Maximum profit is the dollars received when you first sell the puts. Maximum risk is to be ‘put’ MOS shares at the net cost points listed in the chart. In a worst case you’d end up owning MOS at prices from 19.4% - 58.4% below yesterday’s closing price.
Maintenance margin requirements are approximately 20% of the net exercise costs and could be met with cash, T-bills or paid-up marginable securities like shares of other stocks (if held in the same margin-type account).
Dr. Paul Price
www.BeatingBuffett.com
Disclosure: Author is long MOS shares and short MOS options.
EPS in the recently reported fiscal Q3 (ended February 28) were $0.50 versus $0.18 – a big improvement year-over-year but somewhat below the $0.67 analyst estimate. Mosaic shares dropped from $63.80 on March 12th to close at $57.99 on April 5th.
Earnings comparisons going forward will continue to look good as the weak results from FY 2009 are replaced by the recovery mode numbers. Current estimates for the FY ending May 31, 2010 and 2011 are now running about $2.18 and $4.00 although earnings predictability for this industry is not high.
Mosaic is really a long-term play on the worldwide agricultural market. It can benefit from both increased commodity pricing as well as a weakening dollar. I also see it as a future inflation hedge as their raw material holdings can be marked to market upwards if large price increases take hold due to the world’s distrust in financial currencies.
Mosaic was formed in January of 2004 through the combination of Cargill’s fertilizer operations with those of IMC Global. Cargill continues to be the majority owner after assuming 66.5% of the outstanding shares in the merger.
Here are Mosaic’s per share numbers (excluding non-recurring items) as reported by Value Line:
| FY* | Sales | C/F | EPS | Div. | B/V | Avg. P/E |
| 2005 | 11.42 | 0.99 | 0.47 | Nil | 8.35 | 32.4x |
| 2006 | 13.61 | 1.15 | 0.18 | Nil | 9.06 | 84.6x |
| 2007 | 13.10 | 1.67 | 0.80 | Nil | 9.49 | 26.5x |
| 2008 | 22.10 | 5.20 | 4.38 | 0.10 | 15.16 | 17.5x |
| 2009 | 23.17 | 5.11 | 4.28 | 0.20 | 19.11 | 15.3x |
| 2010** | 16.42 | 3.20 | 2.18 | 0.20 | 18.82 | 22.0x |
| * FYs end May 31st | ** FY 2010 data includes estimates for Q4 | |||||
Earnings are very levered to volume and can shoot up quickly when conditions are favorable as can be seen in the data from FY 2007 and FY 2008. With expected EPS of about $4 for the year ending May of 2011 the forward multiple is just 14.5x. That’s about as low as this stock has seen since the combination with IMC Global.
MOS shares peaked at $163.30 in mid-2008 as commodity prices surged only to fall back to $21.90 in the late 2008 market meld-down. I was a buyer back then and continue to hold now at $57.99/share.
Value Line and others see normalized 3 – 5 year earnings power of about $4.50 /share. Even a 15.5 multiple on those EPS would bring MOS back to about $70. That would be a fraction of its 2007 – 2008 highs of $97.60 and $163 but well above today’s quote.
The high volatility of these shares (Beta = 1.7) make them ideal underlying shares for option sellers who believe in the long-term story. Here are some pretty conservative LEAP options that make sense to me for those who’d be willing to own MOS shares at price points below yesterday’s closing price.
| Sell | Put Premium /sh. | Net Cost ‘If Put’ | Margin of Safety* |
| Jan. 2011 $50 Puts | $4.30 | $46.70 /sh. | 19.4% |
| Jan. 2012 $40 Puts | $3.40 | $36.60 /sh. | 58.4% |
| Jan. 2012 $45 Puts | $5.00 | $40.00 /sh. | 31.0% |
| Jan. 2012 $50 Puts | $7.00 | $43.00 /sh. | 25.8% |
| Jan. 2012 $55 Puts | $9.40 | $45.60 /sh. | 21.3% |
| * Margin of Safety = % ‘if put’ price is< $57.99 closing quote | |||
In every case illustrated above the puts will expire worthless on their respective expiration dates if MOS shares:
· Go up.
· Remain unchanged.
· Decline to no lower than the strike price you choose to write (sell).
Maximum profit is the dollars received when you first sell the puts. Maximum risk is to be ‘put’ MOS shares at the net cost points listed in the chart. In a worst case you’d end up owning MOS at prices from 19.4% - 58.4% below yesterday’s closing price.
Maintenance margin requirements are approximately 20% of the net exercise costs and could be met with cash, T-bills or paid-up marginable securities like shares of other stocks (if held in the same margin-type account).
Dr. Paul Price
www.BeatingBuffett.com
Disclosure: Author is long MOS shares and short MOS options.
