Fertile Ground for Profits by Jack Adamo (03-OCT-05)
Mosaic Company (NYSE: MOS ) is in the very boring business of selling fertilizer. Sorry, it’s not as exciting as the newest wireless device, but the stock is up 22% since Jack Adamo’s late May purchase. Gains like that would satisfy the most rabid tech hound.
Mosaic was formed from IMC Global and the former fertilizer division of Cargill. It has not had a full year yet as a combined entity. But its last earnings report makes it clear Adamo and his team have a real powerhouse here. June 30 completed Mosaic’s fiscal year. On a pro forma basis (meaning, as if the company had been merged for the full year) fiscal full year earnings rose 30%.
Quarterly results were even more impressive. Revenues more than doubled, and earnings per share rose 69% to 22 cents per share, from 13 cents per share, a year ago.
The company is optimistic about fiscal 2006 results, saying, ``The potash market continues to show strength and the phosphates market is also doing well, with improving margins.`` The company`s potash mines are operating at or near capacity and are effectively sold out. Exports to Asia continue to be strong, and have more than offset declines in a weaker than normal Brazilian market, which has suffered through a recent drought. Demand is so high that the company currently has potash customers on allocation.
On the expense side of the ledger, the savings gained from the merger are up to $62 million per year and are expected to reach $90 to $110 million by the end of this fiscal year.
Eating Better
The big driver for the fertilizer industry is the improving standard of living in South America and Asia, especially China. People can afford to eat better; hence, farmers need bigger crops. That takes potash and phosphates. (There’s just so much cow manure you can spread around.) Clearly, this is not a fad. This is a long-term trend based on basic human needs. The rapid growth should go on for decades.
When Adamo first recommended Mosaic, he designated it as speculative because of its low interest coverage, which is a risk factor. Adamo said he expected that condition to improve over the next few years, as was the case with Bunge, his other company in the same industry. Adamo was wrong; it only took one quarter. Interest coverage improved from barely two times (earnings covering interest payments) to nearly four times. That means there’s a wide margin of safety now, and earnings can be used to reduce debt, invest in the business, buy back shares or pay dividends. Adamo has removed the speculative designation from Mosaic.
Greedy Insiders
There was some decent Insider buying in Mosaic a while back. At the time, Adamo suspected it was by agreement among management, but with the latest results coming in so strong, he now knows his skepticism was unwarranted. The buying was motivated by good old-fashioned greed. The Insiders were in a position to see how the growth story was playing out.
The company’s stock is now selling at 15 times this year’s expected earnings, which is a lower P/E than the S&P 500. But Adamo doubts there were many companies in that index that grew their earnings 69% last quarter. On a price/earnings-to-growth basis, Mosaic is very cheap. He doesn’t expect it to keep up that torrid growth pace, but even a few quarters of earnings growth of one-fifth of the recent trend and the stock would be a big bargain. So, you can see, there’s lots of comfortable wiggle room in the valuation, and lots of upside potential.
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