Is The Mosaic Spinoff A Good Buy?

| January 27, 2011 | 0 Comments

Very few financial events draw investors’ attention like a spinoff.  It’s a sure way to generate some excitement in the stock market.

A spinoff occurs when a parent company feels the spun off company will be worth more as an independent entity.  For instance, the spun off company may have underperformed as part of the parent company, or it could be in an unrelated industry.

Remember when Pepsico (NYSE: PEP) spun off Yum! Brands (NYSE: YUM)?  That’s an example of a famous – and very successful – spinoff.

It should come as no surprise that Cargill’s upcoming spinoff of Mosaic (NYSE: MOS) is generating some serious buzz.

Cargill, the largest private company in the US, is selling its majority stake in Mosaic.  The news is creating quite a stir… spinoffs are almost always worth buying once they hit the market.  One study shows spinoffs outperforming the S&P 500 by 10% for three years after the event.

Sounds like a good opportunity… so why is Mosaic’s stock price dropping?

I’ll get back to that in a minute.  First, let’s take a closer look at some of the details…

Mosaic is in a unique position because they are a publicly traded company… but 64% of the corporation is owned by Cargill, a private company.  You don’t often see an existing public company spin off from a private company.

What’s more, Cargill and Mosaic are both highly successful companies in the agriculture industry.

Cargill happens to be one of the dominant agriculture companies in the world, with an estimated $108 billion in revenue in 2010.  Meanwhile, Mosaic produces potash and phosphate crop nutrients for the global agriculture industry.  They have roughly $8.5 billion in revenue and a market cap of over $33 billion.

But here’s something interesting… the fertilizer industry is booming.  And for good reason, fertilizer is a key component of the growing economy.

As economic growth improves, millions of people are going to have more money to spend on food.  That means farms need to be super productive to keep up with demand… and fertilizer is what makes that productivity possible.

Check this out…

On July 1st, MOS was trading at a low of $37.61.  On January 18th (just last week), MOS hit a high of $85.45.  That’s an incredible 127% gain in a little over six months!

Much of the climb is due to exploding demand for fertilizer.  And demand isn’t expected to slow anytime soon.  What’s more, as I mentioned earlier, spinoffs typically perform extremely well out of the gate.

In other words, you’d expect MOS investors to be ecstatic about the announced spinoff.

Instead, two days after reaching its 2-year high, MOS plunged 16% on the spinoff announcement.

What’s the deal?

Some investors are taking Cargill’s spinoff of Mosaic as a signal the fertilizer industry has reached a top.  They think Cargill is trying to exit at the peak of the market.  And it’s causing the stock to pull back.

Here’s the most interesting part… these investors are dead wrong!

You see, Cargill has perfectly good reasons for spinning off Mosaic. Reasons which have nothing to do with the fertilizer industry’s future prospects.

Cargill is mostly a family owned company.  So, it’s not surprising the granddaughter of the company’s founder set up several charitable trusts.  What’s amazing is that over time those trusts have come to own 17.5% of the company!

Here’s the thing…

When the Cargill granddaughter passed away, those trusts started looking for ways to diversify into more liquid investments.  And the Mosaic spinoff now gives them precisely that opportunity.

Let me put it this way… the Mosaic spinoff isn’t a market signal.  It’s simply a matter of circumstance.

And it’s a great money-making opportunity for savvy investors.

MOS is now positioned as a prime takeover target.  Several big players in the basic materials sector are looking to gobble up the major fertilizer producers.  Without Cargill’s huge chunk of ownership, MOS is freed up for acquisition.

Don’t let the recent market action in MOS fool you.  The outlook for this company is excellent.

Bottom line… the rampant selling of Mosaic shares is creating a buying opportunity.  The spinoff can only be a good thing for this thriving fertilizer company.  Don’t be afraid to take a chance on Mosaic, especially if the stock continues to sell off.

Tags: , , , ,

Category: Stocks

About the Author ()

The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

Leave a Reply

Your email address will not be published.