JPMorgan says a $50 cut in potash price equates to a $0.75 cut in MOS EPS. MOS was projected to make $4.75 this year. So now let's assume they make $4.00. If MOS can buy 43M shares from the Cargill Trust this year, the EPS would increase to $4.45, which puts the forward P/E in the mid 9's. Because of uncertainty, the sector probably doesn't deserve more than a 12 P/E right now. If someone assumes MOS can buy 43M shares and gives them a 12 P/E, any price under 53 would be considered a good price to buy.
These are of course a bunch of "what ifs" but that's really all you have when investing in any stock. It's all specualtion on future earnings.
How do we know that any price cuts will be that draconian. We may just be looking at a slight price drop as the producers may not want to all cut their prices that much. If prices drop too much, some of the producers may cut back on production, thus lifting the price back up. We will have to wait and see.
Sentiment: Strong Buy
No one knows for sure. Hedge funds are pricing stocks as though potash is going to $300/ton or lower. If you or anyone thinks $300 is too low, then it makes sense to load up on the ags now. I may sell my AAPL stock now that I'm finally in the green and move those funds into MOS. I feel anything in the 40's is a good buy. Anyone who bought for the dividend yesterday really got screwed. Too bad for them.
One thing to keep in mind is that a lot of their deliveries are contractual. They do not use spot prices quite as much, so at least for this year their earnings would not come down a whole lot. Of course next years contracts are going to be a lot harder to make $400/ton when the Russians are dumping for less. The supply demand picture is going to be a lot different going forward so it really is going to be hard to forecast a year out. Some marginal players may exit and allow low cost producers to ramp production. Low cost producers can make it up on volume and cut out the weaker players. Also with a drop in price it would encourage more Potash usage. The Indians for example are under applying Potash but would be encouraged to use more with the drop in price. My point is that in the long run this is beneficial to low cost producers like MOS and POT as they will be able to keep marginal players out of the market.
It's my understanding the current potash price was closer to 350 than 400. Maybe I'm wrong about that. My numbers also assumed MOS buys back 43M shares. If there is $100 drop in potash from the current price and MOS does not buy back shares, you're valuation would be accurate. I guess I'm optimistic about the share buyback, especially now that the price is so much lower.