Why Mosaic's Price Targets May Be Understated

Shares of Mosaic NYSE: MOS have been on a steady downtrend since their peak price of $79.28 per share in April 2022. The decline had only accelerated with a more substantial fall lasting for the entire second quarter of 2023 when prices went from virtually $43 per share down to a low of $31.44 in May.

Following these declines, as is typically the case, analyst ratings and price targets have been adjusted to reflect the price action. As news and price targets usually deter to hovering around what the price action has done over a period, it is only regular that Mosaic is seeing some price target lowering today.

Other names in the industry have also experienced the challenging environment the industry is facing, with companies like C.F. Industries NYSE: C.F. declining by as much as 29.2% during the second quarter of 2023. C.F., however, outperformed Mosaic by 8.34% during the past twelve months despite being two highly correlated stocks in a joint sector.

The two companies operate in a tight space, which fluctuates closely with the crop and farming sectors' underlying supply and demand dynamics. Considering the underlying trends are touching a cyclical bottom, Mosaic is the cheaper option in a cyclical value play.

New Analysts' Views on Mosaic 

Analysts at Bank of America NYSE: BAC had lowered their price targets for Mosaic, placing the new consensus at $50.00 per share when previously consensus stood at $60.00 per share. Analysts at Barclays LON: BARC took a more aggressive stance toward Mosaic, lowering their price targets from a previous consensus of $50.00 per share to a current view reflecting $40.0 per share targets.

What comes as a surprise is the relative valuation that these analysts are targeting; as the stock is currently trading at a price-to-earnings ratio of 4.4x, it could imply that the 'money' does not like the sector.

'The money' has pivoted their preferences toward smaller capitalization companies in the agricultural inputs sector, a sign of the times pointing to a perceived bull market. Historically, richer valuations stemming from financial stocks and 'small caps' typically signal a more optimistic view of the future.

Smaller companies like Lavoro NASDAQ: LVRO are trading at a significantly higher valuation multiple of 25.0x, implying that the broader markets are willing to pay a higher premium for the underlying company's current - and future earnings. Considering current valuations favor smaller businesses, this dynamic can be viewed as the early pivoting sign in the underlying industry.

By going through the first quarter 2023 earnings results for Mosaic, investors can understand why analysts have taken such a hostile stance concerning the consensus price target. Revenues declined by 8% yearly, not an alarming rate by any means, though a fraction of the scarier bottom-line results.

A 63% annual decline in net earnings, which severely affected the subsequent earnings per share figure, could have been enough to spark the stock price decline and the price target downgrade. However, value investors can go against the grain and find the needle in the haystack.

Perceived Value

While broader markets favor smaller firms, these perceptions are typically guided by short-term intentions, as traders may be looking to exploit near-term catalysts that expand earnings enough to normalize the P/E ratio and provide a quick gain in the underlying stock price. However, on a longer-term view, which is the value investor's natural habitat, when 'the money' does not like and thus disregards a set of names in a sector, it becomes hunting season. Insiders at Mosaic know this and have put their money to back up their views.

According to the latest investor presentation, Mosaic management has allocated up to $456 million into repurchasing shares so far in 2023; considering that these shares were repurchased at prices seemingly higher than today's, investors could reasonably assume that a similar - or larger - set of buybacks may be on the way. Considering that the size of repurchases already represents nearly 4.0% of the company's market capitalization, investors can take this as an aggressive message from insiders saying, 'hey, our stock is cheap!'. 

Management also emphasizes that the agricultural industry's fundamentals are at a cyclical low. Following the stocks-to-use ratio, operators in the space can plan their output and inventory levels accordingly; today marks the lowest reading in the ratio since 2002, falling past the normal ranges for an otherwise five-year average cycle. The smaller firms may pivot quicker (due to their size) and capitalize on these more significant trends. However, long-term investors can squeeze more potential from a more extensive move coming from a bigger company.