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.

Mosaic Co (NYSE:MOS)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.

Reasonably valued

Mosaic is trading at $58.40 per share, with a total market cap of $24.85 billion. The market is valuing Mosaic at around 7.86 times EV/EBITDA. Compared to its peers Agrium Inc. (NYSE:AGU) and Potash Corp./Saskatchewan (USA) (NYSE:POT) of Saskatchewan, Mosaic seems to be quite reasonably valued. Agrium Inc. (NYSE:AGU) is the smallest company among the three, with $15.55 billion in total market cap. At the current trading price of $104.40 per share, Agrium Inc. (NYSE:AGU) is valued the cheapest at 7 times EV/EBITDA. Potash Corp./Saskatchewan (USA) (NYSE:POT), the biggest company, is worth $34.26 billion on the market. At the current trading price of $39.60 per share, the market is valuing Potash Corp./Saskatchewan (USA) (NYSE:POT) the most expensive, at 10.75 times EV/EBITDA.

Indeed, Potash Corp./Saskatchewan (USA) (NYSE:POT) deserves a high valuation, as it is the world’s leading potash producer, and it is the most profitable company among the three. Its operating margin is as high as 40%, while Mosaic generates a 22% operating margin. Agrium Inc. (NYSE:AGU) has the lowest operating margin at only 13.24%.

Recently, hedge fund Jana Partners has tried to urge Agrium Inc. (NYSE:AGU) to spin off its retail business to drive its share price higher. Jana Partners argued that Agrium Inc. (NYSE:AGU) has not reached its full potential for two main reasons: first, Agrium Inc. (NYSE:AGU)’s true value was burdened in a conglomerate structure with two different businesses–a volatile fertilizer business and a stable farm product distribution business. Second, the board did not have a retail experience to efficiently manage the retail business.

Foolish Bottom Line

Among the three, I prefer Mosaic and Potash Corp./Saskatchewan (USA) (NYSE:POT), as they enjoy strong market positions, generate high operating margins, and have reasonable valuations. While Agrium is more of an opportunistic play on corporate actions, both Mosaic and Potash Corp could be long-term stocks for patient investors.

The article This Company Could Become One of Buffett’s Favorites (Part 1) originally appeared on and is written by Anh HOANG.

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