5 Takeaways From Mosaic’s Last Earning Call

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Fertilizer maker Mosaic (NYSE: MOS) had its earnings call on Jan. 4 indicating a cautious short term outlook while at the same time maintaining a positive long term viewpoint. Earnings per share of $1.47 pleased the Wall Street financial gods. However, opportunities and challenges alike face Mosaic and its peers in the fertilizer industry. Investors need to pay heed to five important takeaways from the last earnings call.

1. Excellent balance sheet – Companies with lots of cash and low debt levels should reside at the top of any investor’s watch list. Mosaic sits on top of a $3.4 billion mountain of cash which represents 26% of its equity base. This provides management ample opportunity for dividend payouts, share buybacks and prudent acquisitions. In fact, pending approval, Mosaic plans to fund the proposed Faustina ammonium facility organically out of operating cash flow highlighting its pragmatism.

Mosaic sports low debt levels with a low long term debt to equity ratio of 8% and a total debt to equity ratio of 33%; well below my personal threshold of 85%.

2. Lower potash prices – Mosaic’s operating earnings decreased to $560 million from $797 million a year ago, a 30% decrease brought about by the lack of a contract with China and India.

Recently, Chinese fertilizer company, Sinofert, came to a lower price agreement (around $400 per ton) with Canpotex, a marketing company owned by Mosaic and other potash producers, Potash (NYSE: POT) and Agrium. More importantly, this agreement will only last six months. Despite this, the hope of higher potash sales volume spurred positive Wall Street sentiment boosting share prices of the aforementioned companies, 5.5%, 5.1%, and 5.4% respectively since the agreement was announced (chart below).

<img src="http://media.ycharts.com/charts/47a021da1563e03def0010b23aff3449.png" />

MOS Total Return Price data by YCharts

The Chinese feel the sting of a softening economy. As a result, they utilized imports from other trading partners. Leveraging this fact they negotiated lower prices. However, Mosaic’s management feels the agreement with Canpotex signals a further increase in demand.

The investing public exists in limbo regarding the state of contract negotiations between Canpotex and the Indian government. However, speculation remains that India will want in on lower prices.

In Mosaic’s last earnings call, management remains adamant that fertilizer needs will increase over time as more people need to be fed from basically an unchanging amount of arable land.

3. Logistical problems – Low Mississippi river levels pose logistical challenges in the delivery of fertilizer. This will encourage distributors to buy earlier than normal to mitigate against the possibility of the Mississippi becoming unnavigable. In a way, this represents a short term timing opportunity.  Further on out, however, a dry Mississippi river can disrupt demand in the more intermediate term.

4. Robust domestic demand – Robust domestic demand boosted Mosaic’s sales of North American potash by 41% and kept sales of phosphate even. Ironically, high oilseed and grain prices from drought served as catalysts for this increase.

Domestic demand boosted the bottom lines of Mosaic’s competitors as well. Potash experienced a 26% increase in shipments during its most recent quarter versus the same time last year. Intrepid Potash (NYSE: IPI), a potash producer operating primarily in the United States, increased its revenue and net income 14% and 30%, respectively. It also increased operating cash flow by 2% and maintains a pristine balance sheet.

Concerns abound in the farming community about a crop price bubble. Corn prices hit a high in August 2012. Worries about weather and drought conditions causing the previous supply imbalance may put a friction on future domestic demand.

5. Phosphate demand – Briefly, robust demand in the western hemisphere tempered by weaker demand in the east balances everything out. Management expects this trend to continue for a while.

Conclusion

To sum up, Mosaic’s excellent cash position will aid in weathering the intrinsically volatile nature of the fertilizer business. Management feels Mosaic and other Canpotex members can aid in meeting the fertilizer needs of China, India and the world over the long term. Fears caused by low Mississippi river levels can spur short term panic buying in anticipation of the river losing navigability. Short term, robust domestic demand remains questionable due to the near bubble condition of crops like corn, oilseed and grain. On the whole, cash is king, and long term prospects due to a growing world population remain bright, making Mosaic worthy of attention.


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