A Fertilizer Giant Set to Rock the Street Next Week
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Record plantations: true. Record harvests: false. The verdict: upbeat outlook for fertilizer makers. Amid all this enthusiasm, one of the leading industry players is set to report its fourth-quarter numbers next week.
Though what it will report has nothing to do with what’s coming, there are enough reasons to believe Mosaic (NYSE: MOS) could surprise us next week.
Seed king Monsanto’s (NYSE: MON) third-quarter numbers released last month gave us a good insight into how the U.S. planting season shaped up this year. An excellent season resulted in a solid jump in its revenue, setting base for a great full year for the company. We got further encouraging signs when Agrium (NYSE: AGU) forecasted its second-quarter earnings to be near or at the top range of its guidance, thanks to firm prices for some products.
Getting an idea what to expect from Mosaic’s fourth quarter? Well, the company had already stocked up in anticipation of an excellent planting season. But so strong was demand that within a month of announcing its fourth-quarter guidance in March, Mosaic was encouraged to raise its volumes guidance. In an interview to Reuters, Mosaic’s CEO Jim Prokopanko mentioned how the company had sold the same amount of potash on a single day in March as it had in the whole of January!
Which tells me that Mosaic’s potash volumes should come in very close or at last year’s fourth-quarter level, i.e., around 2.2 million tonnes. On the other hand, prices of potash (MOP) have softened in the past three months. But though Mosaic’s average realized prices will be lower than its third-quarter rates, they should anyway be around 10% higher from the year-ago quarter. The net effect would mean a reasonable jump in its potash segment revenue on a year-over-year basis.
Phosphate to Pitch in
As for its phosphates segment, I am expecting phosphate volumes to be between 5-10% lower than last year. Phosphate has been a dampener not just for Mosaic, but also for peers like CF Industries (NYSE: CF) for some quarters. High input costs and low selling prices dented both Mosaic’s and CF’s phosphate division margins in their respective last quarters. But with demand bouncing back, CF predicts an improvement in the nutrient market moving on.
Thankfully, prices (of DAP) have rebounded sharply, gaining nearly 17% from their lows in March. To top that, input prices were showing signs of easing from third quarter itself. So the segment margins could actually turn out to be better than Mosaic’s earlier flat-rate prediction despite low volumes.
Overall, Mosaic has a good chance to top analysts’ estimates of 12% and 21% dips in revenue and earnings per share, respectively.
Mosaic’s earnings call is also likely to throw light on some key matters that will shape its year ahead. One is updates from Canpotex, the three-member legal cartel that controls all potash exports out of Saskatchewan. Mosaic is the second-largest stakeholder behind PotashCorp (NYSE: POT) and ahead of Agrium. After bagging an order from China in March, not much has happened. With key buyer India not signing any contract till date, any hint of the nation signing on in a month or two would be welcome news. Agrium hopes India to pull up soon. The country is already pushing up demand for phosphate. Phosphate Chemicals Export Association, which has Mosaic as one of its key members, agreed in May to supply India with DAP at $580 per tonne under an agreement to run until February next year.
I’d also love to have the progress report of Mosaic’s South Fort Meade mine near Florida, which remained inoperative since 2010. Post a recent litigation settlement, Mosaic is getting ready to run the mine at full capacity soon—a move that will result in higher phosphate rock production thereby reducing outside rock purchases by nearly 50% and lowering input costs significantly.
The Foolish Takeaway
Chances of Mosaic impressing the Street next week are high. In fact, I think any dip in Mosaic’s shares now would create a great opportunity simply because the company looks headed to a great financial year 2013. While crop prices and farm conditions are unpredictable, the mining advantage mentioned above is certain. Also, settlement of a potash litigation with PotashCorp enables Mosaic to sell 1.1 million tonnes to outside customers instead of to PotashCorp from 2013 as well as export an additional 1.3 million tonnes via Canpotex.
Not to forget, the U.S. Department of Agriculture has just lowered corn yield forecasts and corn prices are hitting 52-week highs, which means greater purchasing power and pricing power (for nutrients) in the hands of farmers and fertilizer makers, respectively. As for investors, I feel they are in safe hands with Mosaic.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.