Beating Buffett

Mosaic [NYSE:MOS] Oct. 13, 2009 $48.60

52-week range: $21.94 (Nov. 20, 2008) - $59.34 (May 20, 2009)

 Mosaic, formed through the merger of IMC Global and Cargill’s crop nutrition business, is a major global producer and distributor of crop nutrients. The company mines, processes, and distributes the three key fertilizer products- potash, phosphate, and nitrogen. Mosaic is #1 worldwide in phosphate and #2 in potash production. They also manufacture and distribute animal feed ingredients. The company serves customers in over 40 countries.

The commodities boom of late 2007 into early 2008 pushed operating margins to record levels in FY 2008 [FYs end May 31]. EPS surged to $4.38 and $4.28 in the past two fiscal years but the current year is expected to come in at only $2.80 /share. 

Zacks expects a rebound to $4.44 in FY 2011. MOS was considered a great ‘weak dollar’ play being both an exporter and a commodity producer. As such their shares ratcheted up to $97.60 in late 2007 on the way to their all-time high of $163.30 in 2008. 

At today’s quote of $48.60 this appears to be a good ‘cycle low’ entry point for long-term investors. The company recently pre-paid $1 billion in long-term debt leaving the balance sheet with no debt (net of cash on hand).  

Dividends were initiated in 2008 and stand at $0.05 quarterly for a small, but well-covered current yield of 0.41%. 

Cargill still owns about 64.2% of the outstanding shares from the contribution of their fertilizer operations at the company’s creation in 2004. 

The high Beta @1.70 makes for exceptional option premium for those willing to sell calls and puts. This is where I see a great play.

Here is a good looking combination that makes sense to me right now…

If Mosaic shares merely stay above $45 through the Jan. 21, 2011 expiration date:

• The $45 calls will be exercised.
• You will sell your shares for $45,000.
• The $45 puts will expire worthless.
• You will have received at least $250 in dividends.
• You will have no further option obligations.
• You will hold no shares and $45,250 in cash.

The bottom line: 

If Mosaic shares go up, stay unchanged or even if they drop by as much as 

$3.60 /share (-7.4%) you will end up with a net cash-on-cash profit of $17,750.

$17,750/$27,500 = 64.5% total return

achieved in about fifteen months.

What’s the downside?

If Mosaic shares finish below $45 on January 21, 2011:

• The $45 calls will expire worthless.
• The $45 puts will be exercised.
• You will be forced to buy another 1000 MOS shares.
• You will need to lay out an additional $45,000 in cash.
• You will have received at least $250 in dividends.
• You will end up with 2000 MOS shares and $250 cash.

What’s the break-even point on the whole trade?

On the original 1000 shares it’s their $48.60 purchase price less

the $12.60 /share call premium = $36.40 /share.

On the ‘put’ shares it’s the $45 strike price less the $8.50 /share

put premium = $36.50 /share.

Your overall break-even would be the average of those or $36.45 /share.

MOS shares could decline by as much as $12.15 share (-25%) from the 

trade’s inception price without causing a loss.  

Disclosure: Author is long MOS shares and short MOS options.