The Mosaic Company – A Fertile Idea for LEAP Option ‘Put’ Sellers
Mosaic [NYSE:MOS - $57.99] The Mosaic Company (Mosaic) is a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. They operate through three business segments: Phosphates, Potash and Offshore. The Phosphates division produces crop nutrients and animal feed ingredients. The Potash segment mines and processes potash in Canada and the United States. The Offshore segment produces and markets phosphate, potash and nitrogen-based crop nutrients and animal feed ingredients. The Company serves customers in more than 40 countries. As of May 31, 2009, Cargill, Incorporated owned approximately 64.3% of the Company’s outstanding common stock.
EPS in the recently reported fiscal Q3 (ended February 28) were $0.50 versus $0.18 – a big improvement year-over-year but somewhat below the $0.67 analyst estimate. Mosaic shares dropped from $63.80 on March 12th to close at $57.99 on April 5th.
Earnings comparisons going forward will continue to look good as the weak results from FY 2009 are replaced by the recovery mode numbers. Current estimates for the FY ending May 31, 2010 and 2011 are now running about $2.18 and $4.00 although earnings predictability for this industry is not high.
Mosaic is really a long-term play on the worldwide agricultural market. It can benefit from both increased commodity pricing as well as a weakening dollar. I also see it as a future inflation hedge as their raw material holdings can be marked to market upwards if large price increases take hold due to the world’s distrust in financial currencies.
Mosaic was formed in January of 2004 through the combination of Cargill’s fertilizer operations with those of IMC Global. Cargill continues to be the majority owner after assuming 66.5% of the outstanding shares in the merger.
Here are Mosaic’s per share numbers (excluding non-recurring items) as reported by Value Line:
|
FY* |
Sales |
C/F |
EPS |
Div. |
B/V |
Avg. P/E |
|
2005 |
11.42 |
0.99 |
0.47 |
Nil |
8.35 |
32.4x |
|
2006 |
13.61 |
1.15 |
0.18 |
Nil |
9.06 |
84.6x |
|
2007 |
13.10 |
1.67 |
0.80 |
Nil |
9.49 |
26.5x |
|
2008 |
22.10 |
5.20 |
4.38 |
0.10 |
15.16 |
17.5x |
|
2009 |
23.17 |
5.11 |
4.28 |
0.20 |
19.11 |
15.3x |
|
2010** |
16.42 |
3.20 |
2.18 |
0.20 |
18.82 |
22.0x |
|
* FYs end May 31st |
** FY 2010 data includes estimates for Q4 |
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Earnings are very levered to volume and can shoot up quickly when conditions are favorable as can be seen in the data from FY 2007 and FY 2008. With expected EPS of about $4 for the year ending May of 2011 the forward multiple is just 14.5x. That’s about as low as this stock has seen since the combination with IMC Global.
MOS shares peaked at $163.30 in mid-2008 as commodity prices surged only to fall back to $21.90 in the late 2008 market meld-down. I was a buyer back then and continue to hold now at $57.99/share.
Value Line and others see normalized 3 – 5 year earnings power of about $4.50 /share. Even a 15.5 multiple on those EPS would bring MOS back to about $70. That would be a fraction of its 2007 – 2008 highs of $97.60 and $163 but well above today’s quote.
The high volatility of these shares (Beta = 1.7) make them ideal underlying shares for option sellers who believe in the long-term story. Here are some pretty conservative LEAP options that make sense to me for those who’d be willing to own MOS shares at price points below yesterday’s closing price.
|
Sell |
Put Premium /sh. |
Net Cost ‘If Put’ |
Margin of Safety* |
|
Jan. 2011 $50 Puts |
$4.30 |
$46.70 /sh. |
19.4% |
|
Jan. 2012 $40 Puts |
$3.40 |
$36.60 /sh. |
58.4% |
|
Jan. 2012 $45 Puts |
$5.00 |
$40.00 /sh. |
31.0% |
|
Jan. 2012 $50 Puts |
$7.00 |
$43.00 /sh. |
25.8% |
|
Jan. 2012 $55 Puts |
$9.40 |
$45.60 /sh. |
21.3% |
|
* Margin of Safety = % ‘if put’ price is < $57.99 closing quote |
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In every case illustrated above the puts will expire worthless on their respective expiration dates if MOS shares:
· Go up.
· Remain unchanged.
· Decline to no lower than the strike price you choose to write (sell).
Maximum profit is the dollars received when you first sell the puts. Maximum risk is to be ‘put’ MOS shares at the net cost points listed in the chart. In a worst case you’d end up owning MOS at prices from 19.4% - 58.4% below yesterday’s closing price.
Maintenance margin requirements are approximately 20% of the net exercise costs and could be met with cash, T-bills or paid-up marginable securities like shares of other stocks (if held in the same margin-type account).
Disclosure: Author is long MOS shares and short MOS options.
Use Options to Bet on Fertilizer Stocks
By JIM STRUGGER - Barrons.com
Iceland’s active volcano could help shares of Potash and Mosaic.
(Editor’s Note: Steven Sears, our regular options columnist, is out of the office on work-related travel. Today’s guest columnist is Jim Strugger, the derivatives strategist with MKM Partners.)
SHARES OF U.S. FERTILIZER PRODUCERS P otash Corp. of Saskatchewan (ticker: POT) and Mosaic (MOS) have declined more than 15% from their March highs, primarily because grain and nutrient prices have been flat to lower.
This weakness has occurred even though the spring planting season is just beginning and nutrient inventories remain historically lean.
Meanwhile, although knock-on effects of the volcano eruption in Iceland are difficult to quantify, a number of linkages suggest at least a temporary effect on agriculture that may benefit U.S. fertilizer producers.
With Potash and Mosaic both oversold technically and flirting with support at their 200-day moving averages, we believe this confluence of factors will drive shares higher in the intermediate term.
We recommend positioning for both stocks to appreciate toward the high end of their respective ranges over the past several months via bull call spreads.
The bull call spreads are established by purchasing the lower strike options while simultaneously selling the higher strike options, with the maximum gain being the spread between the two strikes.
In Potash, the June 110/120 call spread is offered at $3.00 and makes a maximum of $7.00 with the stock 120 or higher at expiration. In Mosaic, the June 55/60 call spread is offered at $1.18 and makes a maximum of $3.82 with spot 60 or higher at expiration.
U.S. spring planting season is under way, based on the U.S. Department of Agriculture’s most recent crop progress report, which showed that corn planting in the 18 states that accounted for the majority of last year’s acreage was 21% complete, up from 7% a week ago. Weather, particularly in the South, is dry and warm and conducive to fieldwork, according to the USDA, which may explain why corn prices continue to consolidate following an 18% decline since early January.
Spring wheat has dropped 17% over the same period, and these weak crop prices are likely responsible for the poor sentiment that has driven the U.S. fertilizer producers nearly 15% lower in recent weeks.
Meanwhile, U.S. nutrient-producer inventories are historically low. Potash inventories in March were 21% below the five-year average, while phosphate stockpiles are similarly lean. In a recent interview, Potash’s CEO commented that he is expecting a “big rebound” following a sharp decline in global potash shipments last year, which implies that strong demand may outstrip supply that can be met by current inventory levels. This imbalance may alleviate concerns that nutrient pricing is losing momentum, which has been another drag on the shares of Potash and Mosaic.
A peripheral unknown is any knock-on effects from the eruption of the volcano. In its most recent update, the Icelandic Meteorological Office reported that tremors have decreased slightly and that no movements associated with the nearby and much larger Katla volcano have been observed. However, earlier eruptions of the volcano lasted more than a year, and the precedent of Mt. Pinatubo’s eruption in 1991, which lowered temperatures by a few degrees over the following two years, suggests that the current uncertainty will not dissipate soon. Although the volcano’s global effect is unquantifiable, there is a reasonable likelihood that agriculture will be affected both as a direct result of ash-plume damage to crops and through other derivative effects such as transportation dislocations. At the margin, U.S. fertilizer producers may see an increase in demand as a result of these disruptions, in our view.
At the least, ongoing uncertainty related to the volcano and the implications for agriculture could provide a floor at these levels, while a confluence of strong planting-season demand amid an environment of lean inventories stabilizes nutrient prices and provides a catalyst for Potash’s and Mosaic’s shares to move higher over the intermediate term, in our view. Implied volatility in both stocks has slipped toward levels from mid-2007, while skew is historically low, suggesting that investors do not feel compelled to initiate downside hedges.