Mosaic and CF Industries could be severely undervalued (Part 3)
Continued from Part 2
The effect of capital structure
As we saw in Part 1, aside from non-core assets, capital structure is also an important factor to look at. This is where a stark difference between the four fertilizer companies comes in. One measure that tracks how much leverage a company is taking is the debt-to-equity ratio.
Interested in MOS? Don't miss the next report.
Receive e-mail alerts for new research on MOS
Historically, Potash Corp. (POT) and Agrium Inc. (AGU) have been funded relatively more by debt than equity compared to Mosaic Co. and CF Industries. This is because Agrium Inc. (AGU) has several real estate assets it can use as collateral to support its retail business and Potash corp. primarily derives its revenue from the potash fertilizer industry, which enjoys less competition compared to CF Industries.
The special case of Mosaic
Mosaic Co. (MOS) can use more leverage, because the company also has reserves in potash and phosphate mines. But its debt-to-equity ratio has fallen to lows as earnings ballooned and managers weren’t able to distribute earnings to shareholders or repurchase shares, since a large percent of the shares are owned by Margaret A. Cargill’s trusts. That has restricted Mosaic Co. (MOS) from repurchasing its shares in the open market, which will change later this year.
From November 2013, Mosaic Co. (MOS) will be able to repurchase approximately 128.8 million shares held by Cargill, which will be done in three equal annual installments. Based on a share price of approximately $43.48 at the end of August 8, 2013, Mosaic Co. (MOS) could be spending a minimum of ~$5,565 million over the next three years (equivalent to 10% of current shares outstanding each year). The company recently said it has about $2 billion in excess cash and $3 billion debt capacity that it can draw on before it reaches its limit.
Continue to Part 4