How This Fertilizer Stock Met My Expectations

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A sharp drop in revenue and profits of a fertilizer major? That must have been a bolt from the blue for many after all the optimism fertilizer stocks were drenched in for months. I had already sent out warning signals on this one, and it looks like I was right.

Mosaic (NYSE: MOS) is of the first fertilizer companies to kick off the earnings season, and its first quarter was a bummer. So what went wrong, and what lies ahead?

The going gets tough

Double-digit drop in phosphate volumes? Check. Better prices but slump in revenue? Check. Lower profits? Check.

Most of what I expected from Mosaic’s first quarter came true. Sales volumes for its phosphates division slumped 15% year over year, backed by both internal and external factors. While low starting inventory and production constraints because of plant turnarounds were key factors, the situation was exacerbated because of Hurricane Isaac. Peer CF Industries (NYSE: CF) also shut down its nitrogen plant in Louisiana for a few days as a precaution against any possible damage by the storm, though it later confirmed there were no substantial damages reported.

Phosphate prices started picking up some months back as demand on the back of a solid U.S. planting season helped ease the problem of piled-up inventories. In its first quarter, Mosaic’s average DAP selling prices clipped at $529 per tonne, around 7% higher than the previous quarter, yet it remains well below last year’s price level. This, together with low volumes, resulted in a 30% drop in the division’s total sales. Given that Mosaic derives nearly 70% of revenue from phosphate, there’s won’t be much to be excited about unless sales volumes improve.

The situation is quite the reverse for Mosaic’s other segment, potash. While volumes have improved in recent months, prices have remained flat. Demand remains sluggish, so much so that Mosaic even extended its potash plant turnaround to 119 days during its first quarter compared to 76 days a year ago. That things aren’t going to improve so soon became even more clear when potash king PotashCorp (NYSE: POT) shut down its plant at Lanigan for a month around 15 days back.

Will the tough get going?

If you ask me, it won’t be easy for Mosaic going forward, at least for the next few months. As I told you earlier, if demand for one nutrient is offsetting low prices, it’s vice-versa for the other. The problem lies in the way some key global markets are behaving. With as much as 65% to 70% of the company’s total sales coming from international markets, any slowdown in demand translates into substantial hits to the top and bottom lines. That’s what we are witnessing currently – blame China and India for it.

Dual case of complications

Both nations are major potash and phosphate buyers, but have remained extremely slow in their purchases this year. As a result, Canpotex – the cartel that controls all potash exports out of Saskatchewan – suffered a 38% sequential fall in shipments in the month of August. Talks with China for another contract seem to have hit a wall on pricing issues -- the nation wants to pay less than what it had paid for the first half of the year. Although PotashCorp says talks are underway, Mosaic feels a contract might not see the light of the day this year. Last month, the world’s biggest potash producer Uralkali stressed how it will try to at least maintain the prices at which China buys more potash through negotiations.

The case with India is even more complicated. The nation, which accounted for nearly 10% of Canpotex’s 2011 sales and 14% of Mosaic’s total sales in its last fiscal year, seems to be in no hurry to gift the cartel a contract anytime soon. None has come through this year, and chances of one in the next three months appear slim.

If only P and K caught up with N!

Not surprisingly, stress marks are already visible on the foreheads of all three members of Canpotex – PotashCorp, Mosaic and Agrium (NYSE: AGU). In fact, if both Mosaic and PotashCorp are expecting 2013 potash shipments to hit highs of 60 million tonnes, it’s largely pinned on hopes of a bounce back in demand from the two critical markets.

While high performance in its nitrogen segment can help Agrium make up for lost Canpotex sales, Mosaic has no such support, and PotashCorp too derives a pretty small chunk of revenue from nitrogen. Demand for nitrogen has jumped at a faster pace than the other two nutrients over the past decade, and continues to bring in the money for companies that deal in it. This also explains why stock prices of both Agrium and CF Industries (which is also the largest North American nitrogen producer) have shot up by more than 50% each year-to-date. In contrast, Mosaic’s shares have gained only 10%, while PotashCorp’s shares rose a meager 3%.

But there’s a lot of steam left…

Mosaic’s first-quarter numbers are nothing to write home about. Nor is my outlook for the near term too bright. But that doesn’t mean I am writing the stock off completely. In fact, Mosaic’s fortunes could turn around in the fiscal year 2013, as there are things brewing largely in its favour. So if the market continues to punish its shares for disappointing numbers, I’d see it as an opportunity to bag some. Stay tuned to know why, as I’ll soon tell you the reasons. The best way to ensure you do not miss it is by adding Mosaic to your stock watchlist. Click here to add it.

Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. 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.

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