Is This One of the Best Fertilizer Stocks Around?
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For those who follow me on The Motley Fool, the rally in Mosaic’s (NYSE: MOS) shares post earnings release shouldn’t have come as a surprise. I was expecting the fertilizer giant to crush Street estimates, and it did just that with a gaping margin!
But the biggest surprise came in the form of a 100% increase in annual dividends. I had earlier mentioned how the measly dividend despite low debt and huge war chest was one of the few reservations I had about the otherwise fundamentally solid company. Seems like Mosaic heard me. After more than doubling the dividend to $0.50 per share in its third quarter, another raise this time only compels me to shout out loud and say, Mosaic looks like one of the best bets in the fertilizer space. And it looks set for a great financial year 2013.
In better stead
After rising steadily throughout, phosphate prices started losing steam by the time 2011 ended, denting Mosaic’s margins. But despite low prices, its sales volumes rose, as was evident in its last two quarters. Production curtailments at the beginning of this year followed by an excellent planting season in the U.S. helped ease inventory pile up. As the company steps into its first 2013 quarter, not only are phosphate volumes firm but prices (diammonium phosphate) have also rebounded sharply from their lows in March. Peer CF Industries (NYSE: CF), which also bore the brunt of high costs and low prices in its last quarter, too predicts the phosphate market to improve soon backed by rising demand.
If that takes care of Mosaic’s largest division’s top line going forward, the more important news is elsewhere. Like CF, Mosaic’s phosphate gross margins remain under pressure because of soaring input costs. But things should turn for the better in its next financial year because of a critical litigation resolved recently. Since 2010, a permit issue had restricted operations at Mosaic’s South Fort Meade Mine in Florida. A settlement means Mosaic will be operating the mine at full capacity by August, enabling it to increase phosphate rock input production significantly. Once in place, Mosaic’s outside rock purchases could be cut by nearly 50%, providing a big boost to its margins.
The immediate situation isn’t as bright for the other nutrient potash though. Despite relatively firm prices, industry inventories are high. During its fourth quarter, Mosaic’s potash sales volumes were lower as compared to last year but selling prices were up by more than 10%. But the king of potash, PotashCorp (NYSE: POT) feels the situation should improve in a few months’ time. It expects Brazil to import record volumes of the nutrient this year, and farmers in the U.S. to apply high amounts of potash in the upcoming fall season to balance soil nutrient levels.
Another factor indicating a bounce back in the potash market is the way things are shaping up for Canpotex, the three-member legal cartel that controls all potash exports out of Saskatchewan. A China-Canpotex deal is likely this August, and most are expecting India to pick up the pen soon. The cartel exported more than double the amount of potash during the second quarter of this year as compared to the first, raising hopes.
Being the second-largest stakeholder in Canpotex behind PotashCorp and ahead of Agrium (NYSE: AGU), Mosaic will be a key beneficiary of all this. 2013 could particularly be good as Mosaic will be able to sell an 1.1 million tonnes which was going to PotashCorp all the while to outside customers at higher prices, as well as export an additional 1.3 million tonnes via Canpotex thanks to a litigation settlement with PotashCorp. Mosaic will also kick-off a 1 million tonne potash capacity expansion program soon.
Mosaic’s confidence gets a bigger boost with the smash-hit performance of its innovative fertilizer product, MicroEssentials, which has become its premium offering since launch some years back. It achieved record sales in the just ended financial year, and the company has just wrapped up a major expansion program for the award-winning product. If things continue this way, MicroEssentials could be a big revenue driver next year.
The Foolish takeaway
The fertilizer space is soaked with optimism. Agrium, which deals in both potash and phosphates, has just raised its second-quarter earnings forecast substantially. But while the likes of CF and Agrium are at or near 52-week highs, Mosaic is still well off its peak.
After a stellar fourth quarter, Mosaic truly looks set for a ‘blockbuster 2013.’ Despite headwinds, the company finished off the year on a strong note with a 12% rise in revenue. I’ll soon give you more reasons why I tag Mosaic a solid company. Keep watching this space. And don’t forget to add Mosaic to your free, personalized stock watchlist. Click here to add it.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.