Mosaic: Growth in Fertilizers

03/04/2016 7:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

When the Wall Street herd stampedes, it can cause outsized volatility in the short-term and can create terrific opportunities to buy into names that have been excessively hammered, asserts value investor John Buckingham, editor of The Prudent Speculator.

One such example is agricultural crop nutrient company Mosaic (MOS), the fertilizer producer which recently tumbled after CIBC analyst Jacob Bout said he sees the company drawing on its own cash to pay its dividend as he believes Mosaic will have negative free cash flow in 2016.

While he did not evidently suggest that the dividend was in danger, Mr. Bout obviously had more clout on Wall Street than an analyst at RBC who said that MOS’s financial position remains very strong and that the firm will be able to ride out current market challenges.

Nothing we heard on the firm’s earnings conference call altered our view that over the long-term, growth in demand for global crop nutrients will lead to desirable returns for Mosaic.

Crop yields will continue to become increasingly important as the world population expands, less farmable land is available, and more people in emerging economies move up the socioeconomic ladder.

Rising incomes lead to more protein to their diets, which in turn requires more grains to feed the cattle, pigs, etc.).  

We also think that MOS’s current valuation (forward P/E less of 12 times arguably trough estimates and 4.8% dividend yield) is very attractive relative to its own historical valuation measures as well as those of its competitors.

We like that Mosaic’s management has a history of returning capital to shareholders via share buybacks and dividends, all while maintaining the business and investing for future growth.

While MOS certainly could trim its dividend in response to the recent operating environment, the company has raised or maintained its payment since February 2010.

MOS also owns a reasonable Net Debt/Total Equity ratio and we believe it has the ability to cover the dividend with its current balance sheet.

We know that the stock will likely remain on a roller-coaster ride, but we continue to believe that those who buy today will be well rewarded in the fullness of time.

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