Mosaic Co (MOS): Is This Company a Discount or a Trap?

Mosaic Co (NYSE:MOS) is one of the world’s leading producers of concentrated phosphate and potash (NYSE:POT) 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 Co (NYSE:MOS)‘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 Co (NYSE:MOS) 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.