Is This Company a Discount or a Trap?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mosaic (NYSE: MOS) is one of the world’s leading producers of concentrated phosphate and potash which are two key crop nutrients used in agriculture. Due to elevated global inventories and volatile raw material costs, the company’s earnings are expected to drop this year, which may create an interesting buying opportunity. Shares are down more than 67% from their 2008 peak, and have pulled back by 12% in the past month alone.

When I see share price performance like this due to a company (and sector) that has fallen out of favor, my first instinct is to determine whether it is a discount or a trap? If it is a discount, is Mosaic a better buy than its competitors?

What Mosaic does

As mentioned, Mosaic‘s business is divided into two units: phosphates and potash. The phosphate unit accounts for 70% of the company’s revenue and includes four phosphate mines located in Florida and an extensive distribution network. Mosaic is, by far, the largest producer of finished phosphate products in the world, with a production capacity greater than that of the next two competitors combined. 

The potash unit makes up the other 30% of Mosaic’s sales and operates five potash mines in Canada and the U.S. Potash products refer to naturally occurring potassium salts, which are mined and then sold to fertilizer manufacturers and distributors. The company plans to grow its production capacity significantly in the coming years. Currently, Mosaic has 9.3 million tons of capacity and the company expects to increase this amount to 15 million tons by 2021.

The numbers: why so cheap?

Mosaic trades for a seemingly very cheap valuation of 12 times TTM earnings. As I mentioned previously, revenue and earnings are expected to drop for the 2013 fiscal year (which ended May 31) due to low demand and increased pricing pressure, but are expected to rebound in the current fiscal year and beyond. The company is expected to report earnings of $4.14 per share this year, rising to $4.97 and $5.40 for FYs ’14 and ’15, according to the consensus of analysts covering the company. 

One thing to note is that while everyone tends to agree that conditions will improve, there is huge uncertainty as to how much they will improve. For instance, FY 2015 earnings estimates vary from $4.36 per share to $6.70 per share. While it would be great if the latter were the case, it is far from certain how strong the rebound will be for Mosaic and its peers.

The other potash giants: Agrium and PotashCorp

Agrium (NYSE: AGU) is also a supplier of major agricultural nutrients, but is also a leading retail supplier of agricultural products and services. The company operates almost 500 retail centers under a few different brand names. Agrium trades at a seemingly cheaper valuation of just 9.2 times TTM earnings, but earnings are supposed to drop this year (more steeply than Mosaic’s) and are not expected to recover to 2012’s numbers until 2016. The retail exposure is seen as added uncertainty by the market, as the retail demand for agricultural products has been shaky in recent years.

Potash Corporation of Saskatchewan (NYSE: POT), simply known as PotashCorp, is the world’s largest potash producer and the world’s largest fertilizer company. Although it pays about twice the dividend of Mosaic (3.67% vs. 1.8%), PotashCorp is much more highly valued at 15.6 times earnings. PotashCorp is expected to grow its earnings this year, unlike the other two, but the same uncertainty is seen among analysts as I mentioned about Mosaic. In 2015 for example, PotashCorp is projected to earn $3.47 per share with estimates ranging from a low of $2.94 to a high of $4.27, a very wide range.

Buy at a discount or run away?

Out of the three companies mentioned here, I feel that Mosaic is the most cheaply valued relative to its growth potential over the next few years. As a final thought on the valuation of these companies, let’s compare their current share prices to their projected earnings for 2015, after earnings are expected to rebound for all three.

As of this writing, Agrium trades for just under $88 per share and the consensus calls for $10.26 in 2015 (trading for 8.6 times 2015’s earnings). PotashCorp trades at just over $38 and is projected to earn $3.47 that year (11 times 2015’s earnings). Finally, Mosaic trades at 9.9 times 2015’s earnings, clearly the cheaper of the two potash plays, and much less risky and volatile than Agrium. While these numbers are far from being certain, it gives a good indication of the earnings growth potential of these companies relative to their current valuations. 

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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