Before the global economic downturn of 2008, a clear investing
theme had emerged. Rising incomes across the world were leading to
richer diets and triggering a boom for all kinds of stocks that
helped farmers be more productive. This emerging trend helped
enrich shareholders of
, the world's largest producer of phosphates and the third-largest
producer of potash -- a pair of essential fertilizers and
ingredients used in animal feed.
of the company shot up from $30 in the spring of 2007 to more than
$150 in the summer of 2008 -- a 400% move in just 13 months.
Investors began to see profits can soar when demand spikes along
with the price of phosphate and potash.
Of course, the eventual economic downturn highlighted the risk of
. Demand slumped and a price drop made things even worse, pushing
shares down to $35 just seven months later. These days, the
boom-and-bust phases appear to be in the past and the farm belt has
settled into a more predictable, smoother cycle.
Shares of Mosaic had rebounded all the way back up to $85 this
winter, yet have sold off anew and now once again trade below $70.
In light of projections for rising global farm output, the pullback
creates a solid entry point. [My friend Nathan Slaughter agrees.
Read his recent take on Mosaic.
Good, not great
Mosaic just released reasonably impressive fiscal fourth quarter
results. The company generated $2.9 billion in revenue, and
per share) of $1.45 were $0.06 ahead of the consensus forecast.
(Potash, with gross margins in excess of 50%, is the sexy part of
the business. Phosphate, with margins closer to 25%, is not quite
as impressive.) Operating
in the fourth quarter of $973 million was especially impressive,
from $532 million a year earlier.
Free cash flow
was just above $600 million in the quarter, which the company has
been steadily using to pay down its debt.
has shrunk from $3.4 billion a year ago to a recent $790 million.
All that free cash flow has also enabled Mosaic to "attain an
rating, undertake a sizable potash capacity expansion and build up
a considerable liquidity cushion," note analysts at UBS.
The key for this business model is the company's own production
capacity, along with potential output at key rivals. Right now, the
company is operating at about 85% capacity at both its phosphate
and potash mines, right in-line with the industry average. In years
past, when this number has crept north of 90%, it's become a
seller's market because producers can hike prices and customers can
do little about it.
Mosaic is actually embarking on a bit of a balancing act. The
company is boosting capacity at its lucrative potash segment in
anticipation global demand will rise at a fast pace as emerging
economies continue to boost agricultural output. Rivals in Saudi
Arabia and China are also boosting output, though that shouldn't
wreak havoc on industry supply/demand dynamics, at least in the
all-important potash segment. "Longer-term, we believe favorable
potash fundamentals should more than offset potential phosphate
oversupply conditions," note the UBS analysts.
The trends appear to be working in the right direction. Mosaic sold
potash for $404 per ton in the fiscal fourth quarter and expect
this figure to rise to a range of $430 to $455 in the current
quarter. The company sold phosphate for $574 per ton in the last
quarter and could see the figure move up to $590 in the current
Action to Take -->
Demand for potash and phosphate has improved in recent quarters,
but is still not at the peak levels of a few years ago. Shares of
Mosaic deserve to trade at a slight premium to its average
five-year price-to-earnings (
) multiple of 13. Assuming shares trade up to 14 times projected
fiscal 2012 profits, then the stock should move from a recent $68
up toward the $88 mark -- at least that's the logic behind
Citigroup's $88 price target.
Analysts at Merrill Lynch also think a P/E of 14 is warranted,
though they apply it to projected EPS for fiscal (May) 2013 of
$6.75, yielding a $94 price target. This is nearly 40% above
current levels. If the global
starts to get back on its feet and demand for potash phosphate
climbs a bit higher, then shares could eventually move past the
$100 mark. This is a far cry from the $150 level seen in 2008, but
still a solid gain from current prices.
-- David Sterman
P.S. -- I don't know if you're aware of this or not, but a
20-year energy agreement between the United States and Russia is
about to expire. The problem is, this deal supplies 10% of
America's electricity. When the Russians refuse to renew the
agreement, the U.S. will face an entirely new kind of energy
crisis. This disruption could send a handful of energy stocks
through the roof. Keep reading…
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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