The Mosaic Company - Adam Buys A Kite

The Mosaic Company
The Mosaic Company (MOS) is a single source supplier of phosphate and potash based crop nutrients and animal feed ingredients, mining phosphate rock in Florida and processing minded rock into finished phosphate products at facilities in Florida and Louisiana. The company also mines potash in Saskatchewan and New Mexico. Industry peers include Intrepid Potash, Potash Corporation of Saskatchewan, and CF Industries.

Short-Term Value
My short-term (3-6 week hold) target price for the stock is $27.98, with an initial trailing stop at $27.44. Upward price movement will find no resistance, while downward price movement will find support at $27.20 and $26.54, with final support at $25.65.

The Tax Act
The Tax Cuts and Jobs Act of 2017 makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time deemed repatriation transition tax (the “Transition Tax”) on certain earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum tax (“AMT”) and changing how AMT credits can be realized; (6) capital expensing; (7) eliminating the deduction on U.S. manufacturing activities; and (8) creating new limitations on deductible interest expense and executive compensation.

The Securities Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete.

To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.

It is important to note that income tax adjustments applied to repatriated earnings and deferred taxes, may distort a companies earnings and consequently its fair value.

In the case of The Mosaic Company, the company recorded a provisional estimates of the impact of The Tax Act of $457.5 million, with repatriation accounting for $107.7 million, offset by a $202.6 million, non-cash reduction in the deferred tax liability, $2.3 million non-cash, deferred tax benefit related to the reduction of the U.S. federal rate from 35 percent to 21 percent, and valuation allowances against foreign tax credits and anticipatory foreign tax credits of $105.8 million and $440.3 million, respectively.

The Act also repeals the corporate alternative minimum tax, or AMT, system and allows for the cash refund of excess AMT credits. The refundable AMT amounts are subject to a set of federal budgeting rules. The company estimated it will receive a cash refund of $121.5 million net of an $8.6 million charge related to the sequestration rules.

Insider Transactions
In the past 12 months, the company recorded 32 insider trades involving 83,612 shares of stock. Of those 32 insider trades, 24 were Buys involving 69,689 shares of stock, and 8 were Sells involving 13,923 shares of stock, creating an insider buy to sell ratio of 5 to 1.

Acquisitions
The company had not acquisition activity during FY2017.

Growth and Not
There are several year over year growth metrics of interest; revenue growth, free cash flow growth, earnings growth, debt growth, price growth, and finally year to date price growth. For The Mosaic Company, revenue grew by 3%, free cash flow declined by 164%, earnings declined by 152%, debt grew by 37%, and the stock price declined by 14%. Year to date the stock price has increased 9%.

Future Value
My future (5 year hold) target price for the stock is $23, which is an average annual return of (-3%). A prior five year hold of the stock (FY2013- FY2017) would have returned an average of (-11%) per year. Past and future gains are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Any investment has the potential for loss, and past performance is no guarantee of future results.

Baseline and Fair Value
My baseline valuation for the stock is $6. Baseline valuations are based on free cash flow value, net current asset value, book value, and tangible book value. My current fair value for the stock is (-$5). The fair value number is my current valuation for a stock based on earnings, earnings growth, and the current 5 year yield of a AAA rated corporate bond. Value investing buy, sell, and close targets are derivatives of fair value.

Fair Warning
Fair warning means that the time for bidding has ended and an exchange is about to be concluded. The Mosaic Company (NYSE: MOS) - FYE 12/2017 - The stock is OVER VALUED, currently trading above my most recent (-$8) close target. Please See Linked PDF Worksheet

Disclosure:

I hold no shares of The Mosaic Company

Disclaimer: I am an individual investor not licensed or registered with any government or institutional financial agency.

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