Investing can be as simple or difficult as we make it, and one simple theme that I see worthy to invest in is making a play on global population growth.
As the world’s population increases over the coming decades, there will be more demand for agricultural products and thus more demand for fertilizer.
While it might not be the most glamorous investment in the world, I view investing in Mosaic (MOS) as a good way to invest in this theme at a low valuation.
Mosaic is the world’s largest supplier of both phosphate and potassium fertilizers and is a direct beneficiary of increased agricultural demand for products like corn and soybeans.
Global fertilizer prices hit record highs in 2021, and it seems likely that these elevated prices will persist into 2022, which the market may not be giving companies like Mosaic credit for yet.
A confluence of global factors are combining to drive fertilizer prices higher and they don’t seem likely to abate in the short term. These include surging natural gas prices in Europe crimping European production (natural gas is a key input for fertilizer), countries like China, Turkey, Egypt and Russia banning exports as they are concerned with their own food security, and sanctions on Belarus (which accounts for about 15% of the world potash market), along with the general supply chain issues that are affecting all industries.
These tight supply conditions are persisting just as demand historically increases ahead of the spring growing season in the world’s northern hemisphere.
Mosaic has been performing well with these tailwinds behind it — in November, the company reported monthly revenue of $1.23 billion, a 71% increase year-over-year.
All three of the company’s business segments performed impressively, with phosphates sales increasing 49% year-over-year, sales of potash increasing by 67%, and revenue in Mosaic Fertilizantes, its South American division, growing over 100%.
Valuation
Mosaic trades at a cheaper multiple than the broader market, at about 8.6x earnings and an even more attractive 5x next year’s earnings.
Against the current market backdrop where high-multiple stocks are enduring severe multiple reductions, I view stocks trading at single-digit P/E multiples as a better place to be. Furthermore, Mosaic trades at just 1.3x sales.
Returns to Shareholders
While a dividend yield of 0.8% doesn’t exactly jump off the page as a noteworthy payout, it is important to note that Mosaic just doubled its dividend payout in December.
It’s an old investing adage that the safest dividend is the one that was just raised. Furthermore, the company is giving itself more room to grow the dividend over time as earnings grow.
Even better, the company has a $1-billion share repurchase program in place. This plan, announced in August, replaces the previous $1.5-billion authorization which had $700 million remaining on it.
I like the fact that management is buying back about 7% of the company with shares trading at cheap valuations.
Wall Street’s Take
Mosaic earns a Moderate Buy consensus rating, based on five Buys and hour Holds assigned over the past three months.
The average Mosaic price target of $46.89 suggests 12.9% upside potential.
Takeaway
The long-term macro tailwinds combined with the favorable short-term setup, along with the cheap valuation and returns to shareholders, make Mosaic an intriguing stock.
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