Mosaic Q1 Earnings: Accelerating Capital Returns, Expect 17% Return (NYSE:MOS)

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Investment thesis

Mosaic (NYSE: MOS) slightly missed revenue consensus estimates as supply chain disruptions weighed on its operations. However, anyone selling at this stage is missing the big picture.

The big picture here has nothing to do with the quarter that has just ended. It has everything to do with the next quarter and the rest of 2022.

I estimate that Mosaic shareholders will earn a return of approximately 17% over the next twelve months.

In the meantime, I think Mosaic’s free cash flow could reach around $5 billion over the next twelve months, which means its stock is valued at around 4 times its forward free cash flow.

Revenue growth rates are rising and not expected to slow

Mosaic revenue growth rate

Mosaic revenue growth rate

The most important conclusion here is that there is no indication that revenues will slow down. Yes, the first quarter of 2022 had the easiest comparison for Mosaic, compared to the first quarter of last year, and for the rest of the year comparisons are slightly more difficult.

But at the same time, you have to remember that the main catalyst that brought us here, namely the invasion of Ukraine and related events, only started to happen in the later parts of the first quarter.

That means Mosaic’s biggest revenue is yet to come in the coming quarters.

Mosaic? Think a little further than a quarter at a time

Supply chain constraints affect distribution. But these will not last forever and should subside in the second half of 2022.

So you’re in a position where farmers around the world are scrambling for fertilizer, a key commodity they simply can’t live without, all the more pressing at a time when global food prices are rising. .

From the farmer’s point of view, the incentives to get fertilizer are so high. This results in very high prices for potash and phosphate. To illustrate, consider the following table:

Q1 2022 results mosaic

Q1 2022 results mosaic

As you can see above, since Q4 2021, potash selling prices are “only” up 41% since last quarter. And pretty much the same dynamic with phosphate:

Q1 2022 results mosaic

Q1 2022 results mosaic

From Q4 2021 to Q1 2022, DAP selling prices are “only” up 16%. But again, what you need to be thinking about as an investor is not whether or not Mosaic beat the consensus estimate for this quarter.

You need to think about the intrinsic value of the business and whether it will grow in the coming year or not?

Let me make my position perfectly clear. There is no going back to ”normal”. Sanctions and geopolitical tensions will remain stickier than many realize.

Even when the ceasefire takes place, the drivers that brought us here, namely the significant disruption of the fertilizer industry, will remain in place.

Presentation Mosaic Q1 2022

Presentation Mosaic Q1 2022

As you can see above, there is an unmet demand for potash that will remain understock until 2023.

Again, this is all the more urgent as with high food prices, farmers desperately need sufficient fertilizer to increase crop yields.

These elements all work together and allow Mosaic to generate free cash flow, which it expects to return to shareholders.

Capital repayment program

Mosaic has announced plans to return up to 75% of its free cash flow in 2022 through buybacks and dividends.

Let’s see what happens to a firm with high operating leverage during a period of pricing power. For the first quarter of last year, Mosaic’s free cash flow was $30 million. And this time?

For the first quarter of 2022, its free cash flow reached $466 million, or about 15 times more! Meanwhile, during this period, Mosaic repurchased $422 million in stock along with approximately $41 million in dividends. In total, the combined capital returns amounted to $463 million.

Next, let’s try to estimate what Mosaic’s free cash flow could possibly reach in 2022.

Presentation Mosaic Q1 2022

Presentation Mosaic Q1 2022

I will use the sensitivities above while assuming that the fertilizer prices seen in April remain static. price of MOP and DAP price of MOP and DAP

For DAP, once we factor in the cash cost of distribution, we could probably see around $800 million of adjusted EBITDA per quarter.

For MOP (potash), this could translate to $950 million of adjusted EBITDA per quarter.

This means that if DAP and potash prices remained roughly at the same level as the current price and did not rise higher, Mosaic would achieve approximately $1.7 billion in adjusted EBITDA per quarter, or even slightly more.

This means Mosaic could achieve a run rate of approximately $6.8 billion in adjusted EBITDA. Of that, Mosaic needs about $1.3 billion for capital expenditures, which means free cash flow could likely be at least $5 billion.

This means that if prices remain roughly the same, Mosaic will return approximately $4 billion to shareholders in the form of buybacks and dividends.

Valuation of MOS shares – Very high yield

According to my estimates, Mosaic will return to shareholders about 17% of its market capitalization this year in the form of dividends and buybacks.

Or in other words, if my free cash flow forecast is even close to the right, that means Mosaic is valued at around 4 times this year’s free cash flow.

The essential

The most bearish consideration anyone can bring to the table is that Mosaic’s stock price has rallied significantly over the past year, so it needs to be fully assessed in the coming year.

Here I categorically demonstrate that not be the case. The company is in great shape, increasing its free cash flow and massively scaling up its return on capital program.

To anticipate your question, I do not own Mosaic. I own Intrepid Potash (IPI), as I think it’s a slightly more favorable setup. Whatever you decide, good luck and good investment.

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