MOS is down about 26% this month - is it a good bargain?

December 26, 2018

MOS is down about 26% this month – is it a good bargain?

it seems like the global market has been waiting for the last couple of days for the next shoe to drop in the U.S. The Christmas holiday meant that U.S. markets closed early, and remained closed for Christmas Day itself as always, but that didn’t stop markets in Asia from their regular activity, and most seemed to operate on shaky, nervous ground. Always ready with a controversial, nerve-wracking sound bite, the Trump administration used the Christmas break to suggest the federal government’s shutdown will continue until Democrats get on board with his border wall plans, as well as to intensify speculation that the President is looking for a way to get rid of Fed chairman Jerome Powell.

It’s interesting to see how politics often intrude their way into the psyche of the financial markets. I’ve often written about how much the markets abhor uncertainty and change, and for all of President Trump’s bluster and blow about implementing business and market-friendly policies, the truth is that his willingness to draw a hard line and to embrace conflict – in trade abroad with the country’s largest global partners, as well as here at home on domestic issues with anybody that disagrees with him, including members of his own Republican party – has kept the market on edge all year long. No matter whether he is proven correct or misguided in the long run, the effect for now is that the market is finally submitting to that uncertainty and the fear of the unknown that it engenders.

If you look across the market, every single sector has declined significantly in the last three months. Some are harder hit than others, but even supposed defensive sectors like Utilities and Consumer Staples are down somewhere between 10% and 15% over the last month of so as the market appears to be capitulating to an increasingly bearish tone. Don’t be surprised if the pressure continues at least through the end of the year – it looks like more and more investors are starting the inevitable “flight to quality” that so often marks the end of a long-term bull market and the beginning of a brand new bearish trend.

Bearish pressure is putting almost all stocks under a lot of pressure, and driving them near to lows not seen in a year or more right now. The Mosaic Company (MOS) is a company in the Materials sector with a solid fundamental profile, but as a fertilizer and animal feed producer, it operates in a highly cyclical industry of the Materials sector. The extended health of the economy in general suggests that despite the stock market’s current woes, MOS’ cost of goods is higher than normal; whether that is a sign the company’s fortunes are about to reverse remains to be seen. Most analysts are forecasting healthy growth figures for the industry in general, and for MOS in general right now, but if current political pressures continue, they could put even more pressure on the broader economy.

Is the stock a good value right now, given the fact that it is down about 26% in just the last month and is down around levels right now that it hasn’t seen since the beginning of this year? If the market continues to drop as most seem to expect right now, it seems unlikely the stock is going to rebound quickly; but it is reaching some interesting price levels right now that I think at least make it worth keeping on a watchlist. I’m not sure I would call it a bargain just yet, but it also isn’t very far from a “nice price” based on most of the measurements I like to use for bargain hunting.

Fundamental and Value Profile

The Mosaic Company is a producer and marketer of concentrated phosphate and potash crop nutrients. The Company operates through three segments: Phosphates, Potash and International Distribution. The Company is a supplier of phosphate- and potash-based crop nutrients and animal feed ingredients. The Phosphates segment owns and operates mines and production facilities in Florida, which produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana, which produce concentrated phosphate crop nutrients. The Potash segment mines and processes potash in Canada and the United States, and sells potash in North America and internationally. The International Distribution segment markets phosphate-, potash- and nitrogen-based crop nutrients and animal feed ingredients, and provides other ancillary services to wholesalers, cooperatives, independent retailers and farmers in South America and the Asia-Pacific regions. MOS has a current market cap of about $10.7 billion.

  • Earnings and Sales Growth: Over the last twelve months, earnings increased more than 74%, while revenues increased about 47.5%. These numbers were also impressive in the last quarter; earnings improved 87.5%, which sales increased almost 33%. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a .08% over the last twelve months to 8.4% in the last quarter.
  • Free Cash Flow: MOS’s free cash flow is attractive, at $1 billion and translates to a healthy Free Cash Flow Yield of about 9.5%.
  • Debt to Equity: A has a debt/equity ratio of .42. This is a conservative number. MOS currently has a little over $1 billion in cash and liquid assets against about $4.5 billion in long-term debt. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.
  • Dividend: MOS’s annual divided is minimal, at only $.10 per share; that translates to a yield of just .36% at the stock’s current price.
  • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MOS is $27.64 and translates to a Price/Book ratio of 1 at the stock’s current price. Their historical average Price/Book ratio is 1.18, suggesting suggests the stock is currently trading at a discount of about 18%. The stock’s Price/Cash Flow ratio however, suggests the stock is somewhat over-valued, by about 3.6%. On a Price/Book basis, the stock would need to drop just below $26 per share to start offering a really attractive value proposition, which the Price/Cash Flow ratio puts a lower value target around the $21 price level.

Technical Profile

Here’s a look at the stock’s latest technical chart.

  • Current Price Action/Trends and Pivots: The red line on the chart above outlines the stock’s nice upward trend until November of this year; it also informs the Fibonacci retracement levels on the right side of the chart. I’ve included them on this chart because the 61.8% and 88.6% retracement lines provide a good visual reference for the range the valuation analysis I just outlined covers. Given the stock’s current downward momentum, and the overriding bearish sentiment in the market right now, I think a break below the 61.8% line is very likely right now.
  • Near-term Keys: Trying to find a short-term bullish trade in this stock is pretty hard right now, and frankly would fall on the side of extreme, foolish speculation. I also don’t love the idea of looking for a bearish swing-based trade right now, either, primarily because support from the 61.8% Fib line is only about $1.50 away from the stock’s current price. A drop below that price could offer an interesting signal to consider shorting the stock or buying put options; but my preference in that case would be to wait for signs of stabilization and consolidation in the stock at any point between $21 and $26 per share. That could offer the perfect opportunity to buy this good company at a “very nice” price.