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Introduction

The Mosaic Corporation (MOS) is a $59.4 billion company in the chemical manufacturing industry. Market capitalization competitors in this industry include Praxair, Air Products & Chemicals, and PPG Industries. The chemical manufacturing industry is up 57.43% over the past year compared to the S&P 500 which is down 7.20% during the same period. Over the past month, the industry has been up 30.87%, while the S&P 500 has been up 6.96%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, agriculture and chemicals seem to be a great asset class to place capital in during uncertain times; therefore Mosaic will benefit. Also Mosaic’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Mosaic produces. According to Reuters, Mosaic “is a producer of phosphate and potash combined, as well as nitrogen and animal feed ingredients.” This industry is booming. Companies in this industry all have the potential to post outstanding results for shareholders. However, more specific to Mosaic’s business model, the company focuses on “phosphates, potash, offshore and nitrogen.” Regarding phosphate, the fertilizer is made through a combination of various resources. The product is then delivered to various consumers from its operation sites in Florida and England. Moreover, Mosaic also has a potash segment. This segment focuses on industrial use. The company operates in South America but has customers across the world.

This globalization trend is one of the main reasons why Mosaic has performed so well. The dollar is at its worst level in many years, and since Mosaic is based in Minnesota, there is a huge opportunity for extra profit and revenue numbers. Moving back to the business model however, off shoring is another area Mosaic is involved in. This region basically incorporates all the above information. The company creates a market in Brazil to sell its potash and phosphate products to consumers. China, India, and Argentina have all been big buyers. Mosaic also has a nitrogen segment that focuses on marketing a nitrogen brand, Saskferco, in Canada.

Growth

Mosaic has illustrated solid growth prospects over the past year. According to Reuters, Mosaic reported a $5.77 billion revenue product last year. This number is up over 48.14% than it was the previous year. Compared to the industry’s average of 24.17%, investors realize the amazing growth prospects of this company. In addition, Mosaic’s growth can be compared to competitors. Praxair only grew 12.95%, Air Products grew 13.76%, and PPG grew about 13.64%. Clearly there is a significant difference. A significant difference can also be said in relation to earnings. Mosaic grew at an astonishing 21,519.81% last year—a number obviously higher than the industry 15.03% average. Competitors such as Praxair only saw a 20.77% improvement, Air Products with a 40.48% growth rate, and PPG with a 25.26% increase.

In addition, Mosaic has kept its costs under control. According to Reuters, Mosaic has reported gross, operating, and net profit margins of 29.00%, 24.71%, and 16.51% respectively over the past year. Moreover, these numbers are above or near the industry averages of 36.59%, 18.30%, and 16.94%. This comparison illustrates a history of strong cost controls. The current averages are also better (business model respected) than competitor Praxair’s respective operating and net income averages of 19.00%, and 12.70%. Therefore, Mosaic has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors. Air Products reported respective gross, operating, and net income margins last year of 14.28% and 10.86%. Therefore, Mosaic is not only growing very well, but keeping its costs contained.

Compiling all this information together and investors comes across ROE. Over the past year, Mosaic reported an ROE of 30.04%. Therefore, out of all shareholder equity, more than 30% come from earnings instead of debt or stock. This number is great to the industry average of 21.85% and competitor averages of 24.28% (Praxair) and 21.94% (PPG). Therefore, Mosaic has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Mosaic cannot continue its success. The same logic applies to Mosaic’s 13.72% ROA (above industry average) and 16.25% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Mosaic has a forward P/E ratio of 31.78 and a price to sales ratio of 6.53 compared to the industry’s respective 31.11 and 4.41, which shows an undervalued status. In comparison, the rest of the market cap competitors have ratios that are lower than Mosaic. However, there is a silver lining. What makes Mosaic’s figures more enticing is these competing firms aren’t growing so greatly but have fairly high multiples. That idea shows overvaluation, not the mainframe that Mosaic is currently in. Moreover, Mosaic has a relatively low PEG ratio compared to other competitors’ numbers as well.

Efficiency

Mosaic is efficient. Inventory turnover at 6.66 is strong compared to other industry market-cap rivals (PPG: 5.51). Moreover, asset turnover is also strong at 0.83 compared to competitor figures. Receivables turnover also illustrates a number of 13.14, illustrating cash received every 28 days. In terms of liquidation, Mosaic’s current ratio is 1.75. This number is a bit risky, but the company’s capital expenditures have increased (32.36%), which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 29.25% of all Mosaic shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability.

Technical Analysis

Mosaic performed well in the past year. The company’s share price has increased 333.27% year-to-year. This type of growth is incredible for a recessionary-type economy, especially considering the fact that other gas and oil companies have performed far worse. There seems to be some support at the 90 dollar share price range dating back to earlier March 2008. The last time Mosaic reached this amount the company rebounded and appreciated 45%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Mosaic illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 73.15, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Mosaic according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Mosaic is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
April 18th, 2008