THE MOSAIC COMPANY (NYSE:MOS) NOVEMBER 7, 2013 Dan Ballantine, Zige He, and Zuowei Xu
Dec 15, 2015
THE MOSAIC COMPANY (NYSE:MOS)NOVEMBER 7, 2013Dan Ballantine, Zige He, and Zuowei Xu
Agenda
Introduction Macroeconomic Outlook Industry Overview Company Overview Financial Analysis Valuation Recommendation
The Mosaic Company (NYSE: MOS)
Largest combined potash and phosphates producer
Engages in the mining, production, and distribution of crop nutrients
Formed through the combination of IMC Global and Cargill’s crop nutrient segment in 2004
Sector: Basic Materials Industry: Agricultural Chemical
Source: Mosaic Company Website
Current Holding Information
December 17, 2009: Purchased 200 shares at $55.00/share ($11,000 total investment)
November 6, 2013 Price: $ 46.35 Unrealized loss: 15.73% ($1,730) Total Position Value:$9,270
Represents 5.03% of total portfolio value
Source: Yahoo Finance
Macroeconomic Outlook
Population
Crop Fertilizer
Expected global population increases will lead to steady demand for fertilizers over the long-term
Additional pressure for existing farmland to become more productive
Macroeconomic Outlook
Source: USDA, Mosaic, IHS Global Insight
Expected global population increases combined with increased use of agricultural inputs
Agricultural Chemical Industry
Agricultural Chemical Industry
USDA: Price of potash and phosphates decreasing since the high prices in 2011
Retail Price of Potash:$400/ton, down 20% since last year
Source: USDA, InfoMine
Industry Forces Analysis
Industry Forces Analysis
Bargaining Power of Suppliers: MEDIUM Large fertilizer companies have long-term
contract with suppliers Bargaining Power of Buyers: HIGH
Commodity products with little differentiation and control over pricing
Threat of New Entrants: LOW The 10 biggest companies cover more than
80% percent market share Economies of scale
Industry Forces Analysis
Threat of Substitutes: LOW No substitute for potash Lack of cost-effective substitutes
Rivalry among Competitors: HIGH Very competitive Dominated by large companies looking to
increase market share
Industry Performance Analysis
Source: Google Finance
Industry index underperformed the S&P 500 in 2013
Company Overview
Leading producer and marketer of concentrated phosphate and potash crop nutrients and animal feed ingredients
Serves customers in approximately 40 countries
8,400 employees Phosphate Products: crop nutrients DAP
and MAP, animal feed Potash Products: red MOP, white MOP
(salts of potassium)
Source: Mosaic FY 2013 10-K
Company Overview
Financial Performance
Source: Mosaic FY 2013 Annual Report
Company Overview
Product Segments: Potash: 13% of estimated global potash production; 42%
of estimated North American potash production Phosphate: 12% of estimated global production; 59% of
estimated North American production of concentrated phosphate crop nutrients
Source: Mosaic FY 2013 10-K
Company Overview
Potash Segment Three potash mines in Canada; two potash
mines in the United States Production: 7.8 million tonnes
Expansion plan
Source: Mosaic FY 2013 10-K
Company Overview
Phosphate Segment Owns and operates mines and production
facilities in Florida; processing plants in Louisiana
Production: 8.2 million tonnes Low cost strategy
Economic scale Vertical integration
Innovation: Premium Product MicroEssentials® (“ME”)
Sales increased approximately 28%
Source: Mosaic FY 2013 10-K
Company Overview
Distribution Potash Segment:
Domestic and international sales Canpotex, Limited
Phosphate Segment: Phosphate Chemicals Export Association, Inc
Source: Mosaic FY 2013 10-K
Business Risk Analysis
Changing economic conditions and
government policiesGlobal Competition
Variations in crop nutrient
application rates
Significant levels of inventories
Weather Conditions
Source: Mosaic FY 2013 10-K
SWOT Analysis
Strengths Weaknesses- Minimal long-term debt- Strong cash position- Diversified international
sales- Expanding production
capacity
- Decreasing sales volume- Declining margins- Multiple recent strategic
changes
Opportunities Threats- Lower raw material costs- International market
access - Positive macroeconomic
outlook with growing population
- Commodity pricing- Government policies- Increased competition- External demand factors
Cargill & Mosaic Relationship
October 2004: Originally created from Cargill’s crop nutrient business division
January 2011: Cargill family trust plans to liquidate its entire stake (64%) Could have been a sign the company was
overvalued at the time (trading around $80/share)
June 2013: stock buyback request blocked by Cargill trust holders Still hold 129 million shares of Mosaic common
stock
Source: New York Times, Bloomberg
Recent News
MOS Reports Earnings: November 5, 2013 Difficulties due to lower phosphates and potash
prices Diluted EPS of $0.29/share versus $0.98 last year
MOS Announces Acquisition: October 28, 2013 Acquiring phosphates business from CF Industries $1.4 billion for Florida-based phosphate assets
Uralkali Cartel Fallout: Late July 2013 Breakup of a pricing cartel, potash prices
plummet Uralkali plans to pursue higher volume strategy
Source: Mosaic Investor Relations, Bloomberg
Management Outlook
Concerned about short-term potash and phosphate prices, but considers price decreases a cyclical issue
Believes industry will return to normal and continue to grow
Recent strategic change: Shift from potash expansion to phosphates
expansion Looking to expand North America potash operations
Concerns about demand in emerging markets in the next year
Source: Mosaic Calendar Year 2013 Q3 Earnings Press Release
Recent Financial Information
Source: Mosaic 2013 FY 10-K, FY 2010 10-K, CY 2013 Q3 10-Q
NOTE: Mosaic is changing its year-end from May 31 to December 31* FY refers to year ended May 31* Q3 2013 reports Q3 of Calendar 2013, meaning the quarter ending September 30, 2013
Recent Financial Information
Source: Mosaic FY 2013 10-K, FY 2010 10-K, Q3 CY 2013 10-Q
NOTE: Mosaic is changing its year-end from May 31 to December 31* FY refers to year ended May 31* Q3 2013 reports Q3 of Calendar 2013, meaning the quarter ending September 30, 2013
Current Stock Information
Source: Capital IQ, Yahoo Finance
Metric Value
Current Stock Price $46.35
Trailing P/E10.49
Forward P/E 18.11
Dividend Yield 2.16%
Market Cap($ millions)
$19,735.8
Financial Analysis
2009 2010 2011 2012 2013Current Ratio 3.27 3.82 3.47 3.43 3.90 Quick Ratio 2.04 2.41 2.51 2.38 2.67 Cash Ratio 1.67 1.93 2.03 1.99 2.09
2009 2010 2011 2012 2013Gross Profit Margin 26.87% 25.05% 31.41% 27.77% 27.67%Operating Profit Margin 23.31% 18.80% 26.81% 23.51% 22.15%Net Margin 21.91% 12.46% 25.34% 17.26% 18.78%ROA 18.42% 6.64% 17.68% 11.81% 10.77%ROE (Book Value) 29.60% 9.76% 24.68% 16.21% 14.73%EBIT/Tangible Assets 32.99% 16.11% 28.08% 25.34% 18.80%EBIT/EV 13.95% 8.12% 10.09% 12.69% 10.95%
2009 2010 2011 2012 2013Debt/Assets 0.10 0.10 0.05 0.06 0.06 Debt/Equity 0.15 0.14 0.07 0.08 0.08 Interest Coverage 55.45 25.42 522.39 N/A N/A
Liquidity Ratios
Profitability Ratios
Solvency Ratios
NOTE: The years above refer to the fiscal years ending on May 31
Financial Analysis
2009 2010 2011 2012 2013A/R Turnover 12.58 11.15 12.90 13.24 11.29 Days Sales Outstanding 29.01 32.74 28.30 27.56 32.34 Inventory Turnover 6.08 4.76 6.01 6.41 5.16 Days Inventory on Hand 60.02 76.67 60.74 56.96 70.71 A/P Turnover 10.41 10.56 9.02 8.66 8.61 Days Payables Outstanding 35.05 34.56 40.45 42.16 42.39 Fixed Asset Turnover 2.16 1.30 1.64 1.57 1.24 Total Asset Turnover 0.84 0.53 0.70 0.68 0.57
2009 2010 2011 2012 2013Tax Burden 77.65% 70.81% 76.99% 72.94% 84.60%Interest Burden 121.03% 93.63% 122.79% 100.68% 100.22%Operating Profit Margin 23.31% 18.80% 26.81% 23.51% 22.15%Asset Turnover 0.87 0.53 0.78 0.70 0.60 Leverage 1.76 1.49 1.45 1.35 1.39 ROE 33.52% 9.89% 28.79% 16.44% 15.61%
Activity Ratios
DuPont Analysis
NOTE: The years above refer to the fiscal years ending on May 31
Comparable Companies
Source: Capital IQ
Company Ticker Market Cap ($ millions)
Agrium Inc. (TSX:AGU) $12,795.1
CF Industries Holdings, Inc. (NYSE:CF) $12,127.0
Israel Chemicals Ltd. (TASE:ICL) $10,855.3
K+S Aktiengesellschaft (DB:SDF) $5,196.5
Potash Corp. of Saskatchewan, Inc.
(TSX:POT) $27,840.4
The Mosaic Company (NYSE:MOS) $19,735.8
Stock Performance
Source: Yahoo Finance
Comparable Company Analysis
Source: Capital IQ
Target Company Ticker SymbolPrice/Book Value
Forward TEV/Sales
Forward TEV/EBITDA Forward P/E
The Mosaic Company NYSE:MOS 1.70x 2.07x 8.36x 18.11
Comparable CompaniesAgrium Inc. TSX:AGU 2.93x 0.96x 7.19x 10.91 CF Industries Holdings, Inc. NYSE:CF 3.99x 2.71x 5.96x 11.35 Israel Chemicals Ltd. TASE:ICL 3.77x 2.04x 7.99x 12.73 K+S Aktiengesellschaft DB:SDF 1.58x 1.04x 4.28x 16.07 Potash Corp. of Saskatchewan, Inc. TSX:POT 2.84x 4.72x 10.11x 16.89
Comparable StatisticsHigh 3.99x 4.72x 10.11x 16.89 Median 2.93x 2.04x 7.19x 12.73 Low 1.58x 0.96x 4.28x 10.91 Mean 3.02x 2.29x 7.11x 13.59
Comparable Company Analysis
Source: Capital IQ
Multiple Low Median High MeanPrice/Book Value 43.11$ 79.61$ 108.45$ 82.23$ Forward TEV/Sales 16.32$ 37.21$ 89.29$ 42.17$ Forward TEV/EBITDA 18.24$ 32.25$ 46.30$ 31.85$ Forward P/E 27.93$ 32.59$ 43.24$ 34.79$
Implied MOS Share Price
Multiple Weight Implied MOS Stock Price
Price/Book Value 10% 82.23$ Forward TEV/Sales 30% 42.17$ Forward TEV/EBITDA 30% 31.85$ Forward P/E 30% 34.79$
MOS Implied Stock Price 40.87$
Discount Rate
Source: Yahoo Finance
CAPM
Risk-Free Rate 2.62%Market Risk Premium 8.00%5-Year Beta 0.34
CAPM Cost of Equity 5.30%
Year Actual1 84.99%2 24.64%3 -21.68%4 4.12%5 -14.02%
Total Realized Return 61.64%
Arithmetic Annual Return 15.61%Geometric Annual Return 10.08%
Annual Realized Returns
Discount Rate
Share Price 46.35$ Shares Outstanding (millions) 425.82 Market Value of Equity 19,736.76$
Debt $1,010.50
Percent Equity Weight 95.13%Percent Debt Weight 4.87%
Cost of Debt 4.95%Cost of Equity
CAPM Cost of Equity 5.30% 35.00%MOS Realized Return 15.61% 65.00%
Cost of Equity 12.00%
Tax Rate 28.0%
WACC 11.59%
Weighted Average Cost of Capital
Cost of Equity Weightings
DCF Analysis
2014E 2015E 2016E 2017E 2018E Terminal ValueNet Income 679 959 1,213 1,515 1,875 Depreciation 679 909 944 967 988 Capital Expenditures (1,500) (1,300) (1,200) (1,200) (1,100) Changes in Net Working Capital
Less Increases in A/R 274 (176) (23) (23) 4 Less Increases in Inventories 741 (270) (185) (172) (200) Plus Increases in A/P (192) 201 145 156 159
Free Cash Flow 682 324 895 1,243 1,726 20,699 Present Value 611 260 644 802 998 11,962
Discount Rate 11.59%
Calculation of Implied Share Price Terminal ValueImplied Enterprise Value 15,277$ Terminal Growth Rate 3.00%Less Debt (1,011)$ Implied Market Cap 14,267$
Implied Share Price 33.50$
The Mosaic Company Discounted Cash Flow Analysis ($ millions)
Decision Drivers
Strengths Strong balance sheet Growing dividend yield Macroeconomic outlook Vertical integration
Concerns Uncertainty over industry outlook in near future Recent strategic changes Significant uncertainties on product pricing Overly optimistic management outlook on
industry and expansion plans
Recommendation
Valuation Summary Current Stock Price: $46.35 Comparable Companies Valuation: $40.87 DCF Valuation: $33.50
Recommendation: SELL Sell current holding of 200 shares at
current market price resulting in a realized loss of approximately 15.73%
Questions?