Mosaic Co (MOS) Could Become One of Buffett’s Favorites (Part 1) – Potash Corp./Saskatchewan (USA) (POT), Agrium Inc. (AGU)

Recently John Kozey, a Senior Analyst at Thomson Reuters, listed 28 businesses that Warren Buffett might be quite interested in. Those companies meet four of Thompson Reuters’ criteria: (1) a ratio of net debt to market cap is less than 40%, (2) EV/EBITDA is less than 12x, (3) SmartGrowth EPS growth estimates is 2% or more (No Dell), and (4) SmartGrowth revenue growth forecasts are at least 2%. I will talk about each of these 28 businesses in several articles to determine which stocks could be good opportunities at their current prices. In this article, I will talk about the first business on the list: Mosaic Co (NYSE:MOS).

One of the biggest producers of phosphate and potash

Mosaic Co (NYSE:MOS) is the global leading producer of concentrated phosphate and potash crop nutrients for customers in the agriculture industry in around 40 countries. The business is divided into two main segments: Phosphates and Potash. Mosaic Co (NYSE:MOS) is considered the largest global integrated phosphate producer and the fourth largest potash producer. Mosaic Co (NYSE:MOS) accounted for 13% of the world’s concentrated phosphate crop nutrient production and 12% of the global potash production in 2012.

Around 70% of the total revenue was generated from the Phosphates segment, while Potash accounted for around 30% of the total net sales in 2012. However, as the Potash segment enjoyed a higher operating margin than the Phosphates segment, the Potash segment accounted for the majority of Mosaic Co (NYSE:MOS)’s operating earnings of 55%. In 2012, the US and Brazil generated the biggest revenue of $3.62 billion and $2.16 billion, respectively, for the company, while India ranked third, with nearly $1.58 billion in revenue in 2012.

Fluctuating cash flow on conservative balance sheet

In the past five years, Mosaic has managed to generate positive but fluctuating operating cash flow and free cash flow. The operating cash flow has fluctuated in the range of $1.24 billion – $2.7 billion, while the free cash flow has been in the range of $445 million – $2.17 billion. What I like about Mosaic is the conservative balance sheet that it employed in its operation. As of November 2012, it had more than $13 billion in total stockholders’ equity, $3.42 billion in cash and more than $1 billion in debt. Thus, Mosaic had $2.42 billion in net cash. In addition, the company had about $874 million in deferred tax liabilities that were effectively an interest free loan from the government.