Tuesday, 22 September 2015

Mosaic - appraising the post financial crisis low for the fertiliser giant

If there was a reward for companies with interesting and useful investor relations/corporate presentation departments then the potash and related company Mosaic would be very well regarded.  I noted last month after the company's most recent earnings disclosure just how interesting the company's observations were.  Unfortunately such usefulness is not correlated with (at least in the shorter-term) the share price as today's dumping of around 7% reflects.  The fall into the US$33s today is the lowest share price since the 2008-9 global financial crisis as shown below:

And the reasons for this?  Well to quote from the company's own press release it is all about the current fertiliser and related market:

'In response to current crop nutrient market conditions, primarily related to delayed fertilizer purchases in Brazil and North America, The Mosaic Company (NYSE: MOS) announced today the Company will reduce production in its Potash business…In light of current market sentiment, volumes are lower than expected, and prices have weakened.  Mosaic's reduced production is expected to impact per unit costs and segment margins' (across both the potash and potassium divisions). 

Oh dear. Well as the company noted above not only are agricultural incomes under pressure as grain prices fall...

...but other macro variables such as exchange rates induce pressure on the whole system (and particularly in key emerging markets like Brazil as shown below): 
Of course none of this is particularly new - after all Deere in farm machinery blamed Brazil for their forecast pullback during the results season over the summer (see this link here). 

Clearly valuation is going to be difficult as earnings are nowhere near trend and utilisation rates are all over the place but, before we make some best endeavours here, two quick structural observations.  First, we are used to seeing variants of this chart as a rationale and justification for long positions in the (productivity-enhancing) agricultural space - and a pretty compelling chart it is too.  

But this chart also shown by the company in their newly uploaded presentation today raises some other issues.  Whilst they note 'effective potash capacity overstated' my observation would still be that by 2020 operating rates (versus 2014) in both the two key potash belts in the world are expected to be lower.  Now current low prices may change this...but may not too.  Unfortunately I have noted already that K+S is playing hardball with Potash Corp (link here) in a potential bout of industrial consolidation that could help out. (Saying that from today's perspective K+S shareholders should have bitten the hand off of Potash Corp at Euro41+ a share). 

Back to Mosaic.  Buying the share today is a play on a different world - namely one where mining assets, the emerging markets and related exposures are more favourably viewed.  The current forward multiple is high teens EV/ebit with an historic c. 5% free cash flow yield and a current 2.9% dividend (which I would rate as sustainable given the company's debt is only a little more than x1 ebitda).  For what it is worth the company still trades at around x1.2 book.  

Given a choice I would still prefer to play a Deere or (post the M&A failure) a Syngenta - link here or in the mining space a behemoth like BHP Billiton (link here).  

One final point which is very much in Mosaic's favour...the seasonals bottom in late September/early October.  A slavish adherence to this pattern would suggest some fortunes could be made from this ultra-low sentiment point. 

I would agree with this - as above however my choice today is to stick with some of the bigger names to play the bigger theme in markets from a risk-reward and you-can't-hold-everything perspective. 

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