Will the Recent Pop in This Fertilizer Stock be Short Lived?
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After revising their Q2 estimates lower midway through the quarter and a gift from uncle sam of $0.42 per share, Mosaic (NYSE: MOS) "beat" analysts estimates and posted earnings per share of $1.47 compared with $1.40 per share a year ago. After removing the holiday gift from the tax man, the company's net earnings of $1.05 per share still compared favorably to the generous consensus estimates of 0.93 per share, but marked the third straight Q2 that earnings per share took a nose dive when compared to the previous fiscal year.
Excluding gifts, goodies and other libations that have nothing to do with the business of selling fertilizer, pre-tax operating earnings of $560 million is 30 percent below last years $797 million. With operating earnings backsliding so much, lets take a closer peek at the business of selling fertilizer.
Phosphate sales plunged 19 percent year-over-year to $1.76 billion due to fewer tons sold at lower prices. Gross margins also slumped, falling to 18 percent from 22 percent a year earlier. Margins could have been even lower had they not been offset by $25 million in lower costs for ammonia and sulfur.
While prices improved to an average of $544 per ton compared to Q1 of the current fiscal year, they are still well below last years fiscal Q2 average price of $611 per ton.
Weakness in international markets is the primary reason for the decline. The company believes that protracted potash negotiations with India and China caused international dealers to think twice about their phosphate purchases as well. The author agrees with this contention.
Potash sales were also down, falling from $839 million a year ago to $780 million in the company's most recently completed quarterly campaign. As with phosphate, fewer tons sold and lower prices were the culprits.
Sales in North America actually grew by more than 40 percent due to strong fall application demand for this years winter wheat crop while those stymied negotiations with India and China caused international sales to drop by a whopping 57 percent.
On December 31, 2012 Canpotex, the international marketing company jointly owned by Mosaic, Potash Corp (NYSE: POT), and Agrium (NYSE: AGU), inked a deal with Sinofert Holdings Limited (HKG:0297), for Sinofert to buy 1 million tons of potash during the first half of 2013. Since the announcement the market has responded positively as Mosaic's stock has moved up more than 6 percent. What the market might be missing is that the tonnage being purchased satisfies most of the previously agreed upon minimum tonnage of 1.1 million for 2013 as stated in the three-year Memorandum of Understanding from 2010 between Sinofert and Canpotex.
At a recent price of $58.62, in my opinion the stock is over valued by a few greenbacks given that the market may see a further decline in potash and phosphate prices over the next few months. Next week the USDA will release its World Agricultural Supply & Demand Estimates (WASDE) report, the January report is always a harbinger and can impact prices for months afterwards. While the long-term fundamentals of the company and industry are sound, over the foreseeable future the recent pop in Mosaic's stock price could be short-lived.
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