Vast tracts of land are packed full of bumper crops ready to be shipped and processed. These are not for feeding people. That would be far too base a use for the land. Instead these crops are earmarked for conversion into fuel or other useful items. People still need to be fed however, and therefore the land used for both fuel and food must be leveraged to the largest extent possible. One of the most basic ways to increase yields is fertilizers.
A Work of Art
I refer of course to the name of The Mosaic Co. (NYSE: MOS) rather than the quality of its business. On a separate note, the company is even cooler for having “the” in its name. Mosaic has been on the backburner for me for a while. After it dipped below $50 I paid less attention to it. I always liked Mosaic for its predictability and great options premiums on covered calls. It languished about a week last year and I moved on. The company has a small dividend with a yield of 1.7%, which is nice to get but nothing to get excited about.
Mosaic has $3.5B in cash and a debt-to-equity ratio of 0.08. Net margins are at around 25%, which is also very good. Mosaic also has a phosphates business that provides a significant minority of the revenues. Growth in this sector is similar to potash.
I have been reading the Mosaic earnings transcript and there is a lot of information in there. Some of the highlights are opportunities in China, possible opportunities in India, trouble with the Mississippi drying up, and expansion in Canada. The point the company makes sometimes overtly and sometimes subtly, is that in the next few decades farmers are going to need more and more nutrients for growing crops. That is not surprising as both people and industry require more crops to be planted.
It seems like Mosaic is expecting business to grow, but still be temperamental into the new future. Mosaic still seems like a solid buy, and right now potash prices are not as high as they could be. That is actually good news for the rest of us. That leaves an important catalyst in the future that could send the price higher.
The company also lowered guidance for 2013, because India has been worse than expected. The company expects India to start buying Potash again soon, but not right away. Use the short-term against the long-term and buy now to profit later. Analyst recommendations have been split, with some downgrades and some analysts reiterating their positive rating. Lower prices are expected be mitigated by higher volumes to places like China, and in order to smooth out recent supply issues China is buying a lot of potash with regular shipments later.
More Canadian Potash
Potash Corporation of Saskatchewan (NYSE: POT) has usurped a ticker that should have gone to a medical marijuana company. The company has a larger dividend yield at around 2.7%. The company is profitable with half a billion in cash, though with $4B in long-term debt I would like to see more cash available. POT has a higher debt-to-equity ratio at 0.4117, and while it is not alarming makes me like Mosaic better.
All the issues regarding India and the others described for Mosaic apply to POT as well. It is amazing how similar these companies are in terms of margins and other factors. Even the earnings call discusses similar issues about issues in 2012, and continued headwinds in 2013. There is long-term optimism as it is widely believed that farmers will need to apply potash and phosphates to crops to increase yields.
The company also mentioned China jumping back into the global market in late 2012, which surged demand in Asia. India is a major farming country though, and the uncertainty there is likely to weigh on the industry as a whole. All the companies have seen revenue decline compared to 2011, and 2011 was no banner year either. Mosaic has been flat for 3 years and POT has had some swings but is back where it was 3 years ago, meaning there is no favorable entry due to short-term negativity. It also means that certain options tiers are safe and profitable.
No attempt at being clever for Agrium (NYSE: AGU). The company has almost $2B in cash and a debt-to-equity ratio of 0.21. Its dividend yield is similar to Mosaics at 1.88%. The company has a lower net margins, both currently and historically. It sits around 5%. Agrium has a wider range of business operations than the other two. Potash is just a segment.
In the earnings call, India is again cited as being a problem country for the industry as a whole. Especially for phosphates. India is a major importer of phosphates and 2013 is going to be weak due to changes in India’s policies. Agrium has other businesses like nitrogen and seeds. Understanding these would be important to an investment in Agrium, but potash and phosphates seem to be a major part of their business. In that case the low margins turn me away from the stock, though I do not understand where the lower margins are coming from. Both POT and Mosaic have more net income than Agrium.
For now, I like Mosaic best because I have followed it longest and I understand the options activity there better. That might not be a good reason, but with the importance placed on broader issues like countries the companies are facing the same pressures. As businesses they all seem to be walking the same path, which means you just have to pick one. I pick Mosaic, primarily because it has less debt than POT. The industry itself is in a good position, since more food and crops will be needed. I’m sure someone out there can do some fancy math to act like they gave it more thought than saying “I choose you Pikachu,” but I rarely trust any math above an advanced middle school level for finance.