Investment Alert: Buy Mosaic (MOS) Under $37/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
We found a pot stock with lots of upside, but we’re not talking about the marijuana kind. Mosaic is a producer of potash crop nutrients, which is used in animal feed among other applications.
Collectively, the requirement for potash across a vast array of industries means Mosaic has a diverse stream of revenues and better still, we think fair value sits much higher.
- Potash is a relatively scarce resource, with only a few countries producing it, yet it has a wide array of applications.
- The demand for potash is expected to grow in the coming years due to increasing population and food demand.
- Mosaic appears undervalued now after a stark share price fall over the past year.
Why Is Potash A Big Deal?
Potash is best known as an additive to animal feed to help improve health but it’s got a wide array of other use cases too, including:
- Agriculture – Potash is the most important nutrient for plant growth after nitrogen and phosphorus. It is used to fertilize crops, and can help to improve crop yields, quality, and resistance to pests and diseases.
- Industrial chemicals – It is used to make a variety of industrial chemicals, including soap, glass, ceramics, and fertilizers.
- Food production – It features in some food products, such as bread and beer.
- Water treatment – It softens water and remove impurities.
- Road de-icing – Melts ice and snow on roads and sidewalks.
- Explosives – Potash is used in some types of explosives.
- Pharmaceuticals – It can also be used in some pharmaceutical products, such as laxatives and diuretics.
- Glassmaking – Further, it’s used in glass making.
Mosaic’s revenue and earnings have fluctuated due to changes in commodity prices and demand. In 2018 revenues were up 29.4% but they fell 7.1% and 2.5% in the two subsequent years before bouncing back to post gains of 42.3% in 2021 and 54.8% last year.
The share price is famously volatile because revenues and earnings are highly dependent on the prices of potash and phosphate fertilizers. If these prices decline, Mosaic’s financial performance generally suffers.
In spite of the company’s top line variability, operating income has remained strong throughout. Last year, it came in at a massive $4.8 billion yet over the past year the share price has been virtually cut in half from a high near $60 per share to a more recent low of around $35 per share.
Will Mosaic Go Up?
That share price collapse has resulted in what we think is a big discrepancy between the fundamental strength of the firm and the price at which it’s trading. When we ran a discounted cash flow forecast analysis on Mosaic we arrived at fair value of $52 per share, above the analysts consensus of $44 per share.
What could spark a turnaround? We see 3 primary reasons:
- Increased demand for fertilizers: Higher demand would correlated strongly to higher sales and profits.
- Increased prices for potash and phosphate: The company is tethered to the price of potash which has the potential to rise in an inflationary environment.
- Reduced production costs: Lower production costs should translate to higher profitability.
Overall, we see economic tailwinds, and support from cash flows driving the share price higher in the medium to long-term, presenting an attractive opportunity for investors at this time.