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Keaton Cervantes & Matthew RasinskiThursday, April 4, 2013
The Mosaic Company (MOS)
Agenda
• Introduction• Company Overview• Industry Overview• Stock Performance• Macroeconomic Overview• Current Events• Financial Analysis• Valuation• Recommendation
Introduction
• Mosaic (MOS) trades on the NYSE• Listed on the exchange in October 2004
• It is recognized as a Fortune 500 company• Formed through a merger with IMC Global and
Cargill• A merger between a fertilizer company and a crop
nutrition division
• Sector is basic materials & industry is agricultural chemicals
Company Overview
• The Mosaic Company is a combined producer and marketer of phosphate and potash• Mine, refine, and distribute the final product• Produce specialty materials: MicroEssentials, K-Mag, and
Pegasus
• Phosphate and potash are used as fertilizers primarily marketed to farmers as growth supplements for crops and animal feed• Mosaic claims their MicroEssentials, K-Mag, and
Pegasus are the “most advanced crop nutrient products” on the market
2012 10K annual report
Overview Continued
• Customer base – wholesalers, retail dealers, and individual farmers in more then 40 countries• Headquartered in Plymouth, Minnesota, United
States• Employ over 8,000 workers in 8 different countries
• Phosphate – largest producer of finished phosphate products in the world• Potash – sales are expanding globally through an
alliance with Canpotex, the worlds leading potash exporter
Phosphates vs. potash Breakdown – 2012 10k
• Phosphates exceed potash in terms of sales tonnes by segment and net sales, however, not by operating earnings
Phosphate and potash operations
• Mosaic sells phosphate products throughout North America and internationally• They account for 58% of North American production and
13% of global production
• Potash operations are significantly smaller but yield higher profit margins• Distribution activities include: sales offices, port
terminals, and warehouses in the United States, Canada and several other key countries• Key countries encompass China, Brazil, India, Argentina,
and Chile• Involved in blending, bagging, and production
Phosphate production facilities
• Currently have 5 active phosphate crop nutrient production facilities that are located in Louisiana and Florida
• 2 additional plants planned for the future
Potash mining
• Canada – operate 3 potash mines and 1 solution facility
• United States – operate 2 potash mines and 1 solution facility
• Have 3 additional mines under construction
• Considering opening 2 mines in the near future
Distribution networks
• These are the locations of primary distribution centers in South America and Asia
Porter’s 5 forces
• Bargaining Power of Buyers: High• Many suppliers exists, fertilizers and feed are considered
commodities to farmers• Bargaining Power of Suppliers: Moderate• They have near full vertical integration • Nitrogen consumption is an exception
• Threat of New Substitutes: Moderate• Several alternatives exist, however, brand recognition is
quite powerful• Competitive Rivalry within the Industry: High
• Mosaic competes in both price and quality with respect to their domestic and international competitors
• Threat of New Entrants: Moderate• New advances in technology pose a real threat to existing
market participants
Major competitors
• Monsanto (MON) – Provide seeds and genomics alongside agricultural productivity products to farmers around the world
• (Coromande.NS) – Manufacture and market fertilizers, specialty nutrients, and crop protection products in India and internationally
• Potash Corp. of Saskachewan (POTN.MX) – Mine and produce potash and phosphate as a fertilizer and animal feed
• United Phosphorus Limited (UNIPHOS.NS) – Manufacture and sell chemical fertilizers and feed using phosphorus as a major ingredient
2 year Stock performance
• This however, does not represent the entire picture
3 month stock performance
• More accurately represent our position in the stock since its last review
Financial overview
• Mosaic is far smaller relative to their competitors in terms of market cap• According to their latest 10Q report, Mosaic will
engage in a stock repurchase
Financial overview continued
• They rank in the top 20% in the majority of industry characterizations
• 5 year PEG ratio and Dividend Yield are exceptionally high
Macroeconomic overview
• Based on monitoring done by the USDA, the United States is moving out of a major drought spell which lasted for several years
August 14, 2012 March 26, 2013
Agricultural forecasts
• Agricultural commodities are expected to increase according to USDA forecasts• Such macroeconomic events tend to entice farmers to
use access amounts of fertilizers in order to increase yields
• Livestock feed is being consumed at an ever increasing pace both domestically and internationally due to global population growth
Current Events
• FY 2013 Quarter 3 results far exceeded expectations with 3rd quarter profit jumping 26%
• Surprise earnings a result of Foreign Currency gain and increased potash sales in Asian markets
• High earnings despite settlement
Current Events
• Labor contracts (pp. 24-25 of 10k)• Collective bargaining agreements with various labor
unions expire fiscal year ending May, 2013• Implications – this can seriously impact production of
phosphate and potash
• Anti-Trust settlement (pp. 24 of 10Q)• Mosaic along with competitors such as Potash, settle
anti-trust case lawsuit on January 30, 2013 for an aggregate of $43.8 million
• Mosaic admitted no wrong doing
Current Events continued
• Saudi joint venture (pp. 22 of 10Q)• Entered into a Heads of Agreement with Saudi Arabian
Mining Company (“ Ma’aden ”) and Saudi Basic Industries Corporation (“ SABIC ”)
• The joint venture would engage in developing a mine and chemical complexes that would produce phosphate fertilizers, animal feed, food grade purified phosphoric acid and sodium tripolyphosphate in the Kingdom of Saudi Arabia
• Operations are expected to commence in late calendar year 2016
• Mosaic would retain a 25% stack in the $7 billion project
Current events continued
• Stock Repurchase (pp. 44 of 10K)• Limitations on share buybacks due to the Cargill
Transaction ruling end on November 26, 2013• Cargill family can start selling shares due to vesting on May
26, 2013• Management has stated in a press release they will
expand their treasury stock• This is an indication that the stock price is currently
undervalued• Implications of this may result in an unanticipated rise in
stock price• A goal of management is to improve their balance sheet
by decreasing cash and using debt financing to leverage its expansionary strategy
Financial analysis
• Stock Price: $58.52
• Beta: 1.57• TTM P/E: 13.09 • Dividend Yield:
1.70%• EPS: 4.47• Price/Sales:
2.45• Price/Book:
1.88
1 year stock performance compared with S&P500
Financials
• Mosaic currently has minimal amounts of debt on its balance sheet• They plan on accessing the debt markets in the near
future to help finance expansion
• Maintain relatively large sums of cash
Financial Analysis
• WACC• Discount rate of 12.02%• 100% weight on CAPM method • Not ideal, but lack of debt and negative return on equity
made us use
Valuation
• Discounted cash flow:
• Price per share: $61.89
Sensitivity Analysis
• Representation how value changes with respect to the discount rate
Comparative analysis
• By assigning the following weights our comparative analysis yields: $48.97
Triangulated price
recommendation
• Currently hold 200 shares at $55• Purchased in December 2009• Cost basis of $11,000• Current market value of $11,704• Resulting in a total gain of 6.4%
• We recommend Mosaic as a hold
Questions?