A Form 4 filed with the SEC has disclosed that Emery Koenig, a member of the Board of Directors at Mosaic Co (NYSE:MOS), purchased 2,000 shares of stock on April 3rd at an average price of $58.22 per share. Koenig now directly owns 3,000 shares and so this is a large percentage increase in his holdings as well as an investment of over $100,000. The principles of diversification suggest that insiders should be reluctant to buy shares of their company and therefore increase their company-specific risk, so we think that insider purchase are a signal of at least some confidence in the business’s prospects rather than a casual decision. It turns out that studies show a small outperformance effect for stocks bought by an insider (read our analysis of studies on insider trading).
Mosaic is a $25 billion market cap manufacturer of fertilizer and other agricultural products including animal feed. Its most recent fiscal quarter ended in February (the third quarter of Mosaic’s fiscal year). In that quarter revenue was up a small amount compared to the same period in the previous fiscal year. While net income showed a significant increase, this was almost entirely due gains on foreign currency transactions as operating income actually grew only 1%. So currently Mosaic Co (NYSE:MOS)’s business is not particularly strong.
However, some commentators have argued that agriculture is a global growth industry due to higher food demand in coming years. Mosaic trades at only 13 times trailing earnings, which is about right for its current financial performance but would look quite cheap if the company managed to increase its earnings growth rate. We would note however that many other stocks tied to agriculture have trailing P/Es in the same range.
Billionaire Steve Cohen’s SAC Capital Advisors reported ownership of 2.2 million shares in Mosaic Co (NYSE:MOS) at the end of December, after having increased its stake during Q4 (see Cohen’s stock picks). Point State Capital, managed by Sean Cullinan and other former portfolio managers of Duquesne Capital, initiated a position of 1.1 million shares (find Point State’s favorite stocks).
Potash Corp./Saskatchewan (USA) (NYSE:POT) and CF Industries Holdings, Inc. (NYSE:CF) are two other fertilizer manufacturers. Potash Corp. is valued at 12 times consensus earnings for 2014, though it has recently been doing considerably worse than Mosaic: in the fourth quarter of 2012, its revenue and net income decreased at double-digit rates versus a year earlier. As a result we wouldn’t be buying, particularly relative to the company’s peers. CF has also been a not particularly strong performer, with sales falling, but that stock trades at a significant discount to both Mosaic Co (NYSE:MOS) and Potash Corp./Saskatchewan (USA) (NYSE:POT) with trailing and forward P/Es of 7 and 8, respectively. So even if earnings decline a bit- as they are expected to over the next couple years- CF Industries Holdings, Inc. (NYSE:CF) could still prove a good value as long as it is then able to stabilize its business.
We can also compare Mosaic to wholesaler and retailer of agricultural products Agrium Inc. (USA) (NYSE:AGU) and to agricultural technology company Monsanto Company (NYSE:MON). Agrium Inc. (USA) (NYSE:AGU) is currently in the middle of an activist campaign by JANA Partners to split the wholesale and retail businesses from each other against the judgment of management. The stock’s earnings multiples are low, but revenue was up only slightly in its most recent quarter compared to the same period in the previous year. Monsanto has been reporting high growth on both top and bottom lines; however, the market is already pricing in expectations of continued growth and in fact the forward P/E is 20.
The strength of Monsanto Company (NYSE:MON)’s business is encouraging but it might be best to keep the company on a watch list to see if it can outperform analyst expectations in the next couple quarters (as it may have to do to justify the current valuation). Mosaic Co (NYSE:MOS) looks interesting, and we have this insider purchase to consider, but we think that CF’s cheaper stock would make that our first target for further research if we were looking for a good value tied to agriculture.
Disclosure: I own no shares of any stocks mentioned in this article.