At that time, investing in Mosaic (MOS) appealed to me as a contrarian play. Such tactics are best for cyclical industries such as Fertilizers, Steel, and Energy. If one can be disciplined, contrarian views eventually work-out, but they may take years to work themselves through, as the industry and participants rejigger their strategies and Industry Structure realigns. Here is a Harvard Business Review paper from the infamous Michael Porter.
(Note: Those asset managers focusing on socially responsible investing might want to examine the company as a way of diversifying their often heavy portfolio weighting in consumer-oriented companies. In other words, SRI funds are overweighted in tech and retailing and adding Mosaic would be a good diversifier.)
My worst fear at that time (2013) was that there would be a price war in potash. The industry was, and remains, in a global oversupply situation, which isn’t expected to balance for several years. The table below shows the net Supply minus Demand balance for each major fertilizer (numbers are in 000s tonnes). The numbers in brackets represent the percentage that each fertilizer is oversupplied. So (32.8) for Potash in 2018 represents Supply that is 32.8% greater than world Demand.
|Source: Food and Agriculture Association of the United Nations|
Back in 2013, I expected Mosaic’s share-price to decline from the $40s level towards $30-$35 where the shares have much support including on an asset value (i.e., book value) basis. However, this never occurred. It appears the shares are supported by another factor, let’s call it the “X” factor which I frankly do not know. I believe, however, that the smart-money is expecting Demand to eventually catch-up with Supply and for the Industry Structure to improve. In fact, Potash recently proposed to acquire K+S (a very high-cost potash competitor) and potentially close the high-cost mines and keep its new mines that are coming on-line in Canada.
Mosaic’s shares also seemed overvalued back in 2013, despite several bullish reports from the sell-side as well as Seeking Alpha writers. It’s forward P/E was at least 16-17x. However, this has come-down towards 13x, which is a large discount to the S&P500’s P/E of 17x. Also the PEG ratio has declined as forecast growth is now greater than its forward P/E of 13x (see below). Consequently, I believe Mosaic offers a good return-on-risk versus what appears to be an overvalued stock market.
While fertilizer supplies remain high, and farmer economics (via falling Corn and Soybean prices) have declined, factors are moving positive in Mosaic’s direction. These are summarized below:
- A lower Price-to-Earnings ratio compared to historicals and the S&P500
- Improving forecasted earnings growth (S&P Capital IQ expects 16% CAGR)
- Initiation of another stock-repurchase program ($1.5bn worth)
- The potential consolidation of the Potash Industry (via K+S acquisition)
- Competitor Uralkali recently stated that its potash volumes reached their historical levels, and that it would now work on increasing its revenues (rather than selling potash at any price). It is also possible that Uralkali may rejoin the BPC marketing “cartel”, however the company denied that it would.
- Overall demand is slowly increasing. Despite China’s declining economic growth rate, note that a substantial slice of its population is moving into “meat-eating” middle and upper class. (Note that meat production is quite ag-intensive!)
- Declining potash production-costs (new low reached in 1Q’15)
- Improving industry and business-segment profile in Phosphate (via the CF Industries asset acquisition)
Corporate Social Responsibility:
Mosaic is followed by my website given its leadership in ESG. In June’15, the company published its sixth Sustainability Report which is in-depth including the usual ESG data as well as self-implied targets. Mosaic has received many awards for its CSR conduct including the prestigious CR 100 Best Corporate Citizens.
Readers may be asking, so what does this have to do with investing in Mosaic? Well it’s been proven that good CSR management is reflective of good overall management and lower corporate risk.
While the pendulum of supply/demand has yet to balance for the Potash industry, Mosaic’s fundamentals have certainly improved. Since 2013, the S&P500 has risen, yet Mosaic’s share-price remains relatively unchanged. Consequently, any positive catalyst will likely boost Mosaic’s share price.
Full Disclosure: The author is long Mosaic Corporation.