REAL CLIENT MANAGED PORTFOLIOS MEMORANDUM
TO:Real Client Managed Portfolios Fall 2009 Class
FROM: Akrati Johari, Steven Kahan, Prashant Tiwari, & Yana Zalukina
SUBJECT:Mosaic Company Investment Recommendation
DATE:December 8, 2009
Company Overview
Mosaic (MOS) is a leader in the agricultural chemicals industry. Specifically it is the largest global producer of phosphate, and the second largest producer of potash. The company has mining operations in its offshore segment, which gives it growing productive capacity in many emerging markets, in addition to its North American presence. Sales to customers throughout the world provide fertilizer for crops, nutrition for livestock, and industrial products.
Recent Performance
Although Mosaic has some market power, its performance is still tightly linked to commodity prices. Like other such companies, Mosaic’s revenues, earnings, and share price were rising rapidly from the company’s formation in 2004 until the middle of 2008. Revenues and earnings had much more tepid growth in fiscal 2009 (year ended May 31), and are expected to have significant declines in fiscal 2010. The stock price has taken even more dramatic turns. After reaching an all-time high over $160 in June 2008, the price quickly fell to nearly $20 in November 2008. Since then Mosaic has risen with the rest of the market, nearly tripling to close on December 7 at $59.94.
RCMP Portfolio
A purchase of Mosaic stock would be a new position for the RCMP portfolio. Currently, it holds no companies in the materials sector. While Mosaic is typical of equities in this sector for exhibiting a great deal of volatility, the company operates in an area where it should be able to take advantage of the long-term inflationary pressures that extremely expansionary monetary and fiscal policies are building into the U.S. and global economies. Thus, in addition to being a good investment in itself, Mosaic will add a diversification benefit to the portfolio.
Recommendation
We recommend initiating a position in Mosaic by submitting a limit order to buy 200 shares of Mosaic at $55, with the order good until December 31. As mentioned above, we expect 2010 results to show a rather significant decline in revenues and profits, but then Mosaic’s operations should rebound. Thus our discounted cash flow forecast has Mosaic at an intrinsic value of $61.69. Relative value provides generally higher results, such that our triangulation value is $63.45. While this represents about a 6% premium over the current market price of $59.94, we believe that the limit price of $55 will give a more comfortable margin for error. An $11,000 investment would make the Mosaic position about 3% of the total RCMP portfolio or 9% of the invested (non-cash) assets.