Mosaic Co. (MOS) Presented by: Akrati Johari, Phil Nguyen, Iordanis Thomaidis, Charles Gambino and...
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Transcript of Mosaic Co. (MOS) Presented by: Akrati Johari, Phil Nguyen, Iordanis Thomaidis, Charles Gambino and...
Mosaic Co. (MOS)
Presented by: Akrati Johari, Phil Nguyen, Iordanis
Thomaidis, Charles Gambino and Michael Bellisario
Date: 18th March, 2010
Agenda
Industry Overview Financial Ratios Competitor Analysis Multiples Valuation Pro-forma Assumptions DCF and WACC Calculation Macroeconomic Analysis Recommendation
Industry Overview
Agriculture chemicals industry1
3 main competitors2
Mosaic (phosphate) – $6.1B sales Potash (potash) – $3.7B sales Agrium (nitrogen) – $9.1B sales
Consolidation CF Industries to acquire Terra, bidding war with
Yara
1from finance.yahoo.com 2data from trailing twelve months
Company Overview
Based in Plymouth, MN One of the three largest potash
producers World’s largest phosphate producer 13% share of global production $10.3B in sales last fiscal year
Company Overview
Fertilizer – primary macronutrients Phosphorous and potassium
Improve/add nutrients to soil Increase crop yield “More from less”
Most potash mines are deep shaft mines up to 3,300 feet underground
Business Segments
Realignment 2Q2010 Combined Offshore segment with Phosphates
segment “to more clearly reflect evolving business model”
Phosphates (77% of sales) Produce concentrated phosphate crop nutrients
and phosphate-based animal feed ingredients Potash (23% of sales)
Produce potash-based crop nutrients, animal feed ingredients, and industrial products
Strengths
High barriers to entry – capital intensive & claim on natural resources and mines
100 years of high-quality ore reserves 40% market share of North American
production $2.7B in cash – expansion, additional
capacity, acquisitions Products marketed in 40 countries
Weaknesses
Cross-border risks associated with international operations
Seasonality in business that results in needing significant amounts of inventory
Cargill’s majority ownership and representation on the Board of Directors
Sell a commodity product – difficult to differentiate
Threats
Decline in oil and other commodity prices
Competitors look to add capacity/expand into new markets
Governmental policies (subsidies) affecting the agricultural industry
Opportunities
75 million more people in the world every year to feed
Ethanol production expected to increase ~50% by 2015
Growing middle class in developing countries consuming more protein-rich diets
People will always have to eat
DuPont Analysis
ROE 2.11% -0.88% 2.57% 8.71% 7.16%
ROA Decomposition
ROA = OIBI,AT / Sales x Sales / Av. Tot. Assets
Ratio Analysis – Recent Financial Position
Ratios 2008 2009Average 2010 -
2015Profitability EBIT Margin 28.6% 23.3% 14.4%Liquidity Current Ratio 2.2 3.3 3.9Leverage Coverage 31.0 55.4 39.4Debt to Equity 23.0% 16.4% 11.5%Payout Policy Dividend Payout NA 3.80% 3.80%
Industry Competitors
Potash Corp. of Saskatchewan Largest manufacturer of potash
fertilizers Third largest producer of nitrogen Third largest producer of phosphate Revenue breakdown: 43% potash, 31%
nitrogen, 26% phosphate Claim of production capacity greater
than 50% of closest rival
Industry Competitors
Agrium Second largest producer of
nitrogenous fertilizers Third largest North American
producer of potash and fifth largest for phosphate
Attempted to purchase CF Industries
Industry Competitors
Terra Industries Leading North American producer of
nitrogen based products Accepted takeover bid by CF
Industries for $4.7 billion
Fertilizer Industry Breakdown
Data provided by
Relative Sector Performance
Financial data provided by
Financial Comparison
Company Comp Set
Company Name Market Cap Revenue Net Income
EPS EBITDA Margin % LTM
Net Income Margin % LTM
Mosaic Co. (NYSE:MOS) 28,401.3 6,135.9 414.1 0.9 16.4 6.7
Potash Corp. (NYSE:POT) 37,092.3 3,657.6 987.8 3.2 32.7 27.0Agrium Inc. (TSX:AGU) 11,354.9 9,129.0 366.0 2.3 8.3 4.0CF Industries (NYSE:CF) 4,699.0 2,608.4 365.6 7.4 32.1 14.0
Terra Industries (NYSE:TRA) 4,637.9 1,581.4 152.6 1.5 23.5 9.7
Financial data provided by
Multiples Valuation
Company03/12/10 - Stock Price
Market Cap (MM)
Forward P/E Price/Sales
Price/Book
Trailing P/E
Mosaic Co. (NYSE:MOS) 63.80 28401.31 18.73x 4.43x 4.39x 68.5x
Agrium Inc. (TSX:AGU) 72.19 11354.90 15.28x 1.33x 5.21x 30.97x
Potash Corp. of Saskatchewan, Inc. (NYSE:POT) 125.27 37092.32 23.99x 11.14x 5.81x 38.55x
Terra Industries Inc. (NYSE:TRA) 46.33 4637.91 15.59x 3.06x 9.43x 30.58x
CF Industries Holdings, Inc. (NYSE:CF) 96.73 4698.95 14.24x 1.47x 2.72x 13.02x
Multiples Valuation
Stock Price Calculation Forward P/E P/S P/B Trailing P/E
Min 37.99 18.34 75.79 163.12
Mean 48.82 85.96 80.11 183.08
Max 59.65 153.58 84.43 203.04
21.67 135.24 8.64 39.92
In 2006 Management Claimed: Sales volumes for Potash will improve due to a supply contract with a key customer in China.Result: Sales Volumes for next 3 years: 2007: 1478.9 2008: 2251.2 2009: 2817.2
The Phosphates business will show increased gross margins due to increased industry supply and demand fundamentals and our Phosphates restructuring actionsResult: Gross Margins for next 3 years:
2007: 13.5% 2008: 36.5% 2009: 22.0%
Mosaic will begin restructuring the Phosphate segmentResult: Mosaic combined the Nitrogen segment into their Phosphate segment in 2008 and the Offshore segment into their Phosphate segment in 2009
Management Assessment
Revenue Assumptions
Revenues 2007 2008 2009 2010 2011 2012
Phosphate 3203.9 5706.2 5780.6 5730.837 6561.62815 7564.70484
% of Total Revenue 55.49% 58.15% 56.13% 79.50% 82.75% 79.50%
Potash 1478.9 2251.2 2817.2 1712.0425 1645.36295 2307.47286
% of Total Revenue 25.61% 22.94% 27.36% 23.75% 20.75% 24.25%
Nitrogen 129.1 N/A N/A N/A N/A N/A
% of Total Revenue 2.24% N/A N/A N/A N/A N/A
Offshore 1355.6 2223.8 2349.2 N/A N/A N/A
% of Total Revenue 23.48% 22.66% 22.81% N/A N/A N/A
Other (393.80) (368.60) (649.00) (234.28) (277.53) (356.83)
% of Total Revenue -6.82% -3.76% -6.30% -3.25% -3.50% -3.75%
Total Revenues 5773.70 9812.60 10298.00 7208.6 7929.46 9515.352
Revenue Growth 8.82% 69.95% 4.95% -30.00% 10.00% 20.00%
Revenue Assumptions-Potash
Summarized from 10K:
By the start of the 3rd quarter in 2010, Potash demand improving but still below historical levels. Potash segment still operating at reduced production volumes. Despite the improved demand however, Potash selling prices in 3rd quarter will be below 2nd quarter levels
Revenue Assumptions-Potash
Recovery in Potash segment reflects recovery of selling prices and worldwide demand. Higher % of revenues is a result of management's plan: “We continued the expansion of capacity in our Potash segment, in line with our views of the long-term fundamentals of that business. The planned expansions are expected to increase our annual capacity for finished product over the next eleven years”
Revenue Assumptions-Phosphate
Mosaic’s results for the second quarter of fiscal 2010 compared to the prior year period reflected a recovery in Phosphates segment volumes and significant declines in phosphate selling prices.
Although the Phosphates segment’s prices stabilized in the first quarter of fiscal 2010, they have not returned to the historical highs of the prior year period that resulted from strong demand for crop nutrients.
Revenue Assumptions-Offshore
In 2010 Mosaic has again realigned their business segments and moved from three total segments to two by merging the Offshore segment into the Phosphate segment
Other Assumptions COGS: Increase sharply in 2009 due to higher fixed costs as a result of decreased production. After production increases, COGS will start returning to historical levels.
SGA: Sharp increase in 2009 due to same reasons as COGS.
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Cost Of Goods Sold 3840.90 4668.40 4847.60 6652.10 7531.30 6163.35 6660.75 7707.44 8268.84 9509.17 10797.12
% of Total Revenue 87.36% 87.99% 83.96% 67.79% 73.13% 85.50% 84.00% 81.00% 79.00% 79.00% 78.00%
SG&A 207.00 241.30 309.80 323.80 321.40 346.01 380.61 428.19 471.01 565.74 622.91
% of Total Revenue 4.71% 4.55% 5.37% 3.30% 3.12% 4.80% 4.80% 4.50% 4.50% 4.70% 4.50%
WACC Calculation
CAPM
Beta 1.48
Risk-free 3.70%
Equity Premium 5.00%
CAPM 11.11%
Return on Equity Investment
ROE 59.48%
S&P500 1.93%
Cost of Equity:
WACC Calculation
As of May 31, 2009 Rate % of Debt Weighted Average
Term Loans 3.92% 1.01% 0.04%
Industrial Revenue Bonds 6.64% 3.18% 0.21%
Other Secured Notes 7.32% 1.37% 0.10%
Unsecured Notes 7.46% 71.62% 5.34%
Unsecured Debentures 7.15% 19.72% 1.41%
Capital Leases and Other 6.94% 3.11% 0.22%
Cost of Debt 7.32%
Cost of Debt:
WACC Calculation
Weight of equity 91.79%
Weight of debt 8.21%
Tax rate 21.60%
Rate Wt
CAPM WACC 10.67% 90%
ROE WACC 55.07% 10%
Goal Post WACC 15.11%
DCF Valuation
PV of FCF 13,519.27
Less: Debt 2,540.40
Equity Value 10,978.87
# of shares 444.54
Intrinsic Value $29.20
Value +/-10% $26.28 $32.12
Triangulation
Triangulation
Price Weight
Forward P/E 48.82 30%
Price/Sales 85.96 20%
Price/Book 80.11 30%
Trailing P/E 183.08 0%
DCF 29.20 20%
$57.51
Football Chart
Macroeconomic Review
Gross Domestic Product GDP of countries that MOS exports its goods
Sensitive to fluctuation in prices of raw materials→ Adversely affect Sales Inputs = Natural Gas, Phosphate rock , Ammonia ,
Sulfur Outputs = Phosphate , Potash , Nitrogen
Strong International Presence 70% of net sales from customers located outside the
US. Brazil – Argentina – Chile – China - India
Macroeconomic Review
Regulations + Transportation costs Further restriction on greenhouse gas emissions
→ increase operating costs. Cost of delivery → adversely affect sales volume
and prices
Currency Risk Most significant impact from CAD and BRL →
Periodically hedge against exposure to foreign currency risk
Raw Material and Products
2008 2009 2010 2011 2015 2020DAP, $/mt
967 323 300 310 360 400
Potash, $/mt
570 630 400 300 255 220
Projected Prices 2010 - 2020
Source : World Bank ( www.worldbank.org)
Fertilizer Consumption
Source : Potash Corp.com
Gross Domestic Product
Source : Bloomberg
GDP vs Sales Growth
Source : Bloomberg
Oil Prices lead to rising fertilizer prices
Source : FAO State of Commodities markets
Oil Prices – Mosaic’s Stock Price : Highly Correlated
Source : U.S. Energy Information Administration
Forecasted Crude Oil Prices
Source : Source : U.S. Energy Information Administration
Portfolio Correlation
MOS
American Eagle -0.2104
Diamond Offshore 0.8553
Jack Henry 0.4721
McDonalds 0.6805
Walgreens -0.4337
MEMC Electronics 0.4998
Recommendation
We currently own 200 shares bought at $55 on 12/18/2009
DCF Intrinsic Value = $29.20 Triangulated Value = $57.51 Current Stock Price @ 3/17 = $61.91 Hedge against inflation Growth in emerging markets such as India
and Brazil will drive sales growth=> We recommend a HOLD for the 200 shares