Market Hates Mosaic (MOS) - Phosphates Not Up to Snuff

Submitted By Trader Mark
Well, the market is not at all happy with Mosaic's (MOS) results. When you take a step back and look at the big picture everything still looks fine, but the stock market is not about the big picture - only "beating estimates" and/or "raising guidance" - if you don't; you are toast. Mosaic is now toast based on how people will treat it.

The stock is now lower than it was a year ago, despite these metrics
Phosphate prices this reporting quarter: $1013
Phosphate prices 1 year ago: $407
149% price increase

Potash prices this reporting quarter (FOB): $488
Potash prices 1 year ago: $164
194% price increase

But again, it doesn't matter right now because expectations on earnings per share were not met - also some language on their phosphate business will spook people who expect continues 150% growth rates I guess. I assumed at a PE of 5-6 expectations of some slowdown were baked into the stock price but I guess that was an optimistic take.

I do want to highlight the price trends and management commentary in both nutrients Mosaic is focused on

Phosphates 1 year ago: $407
Phosphates previous quarter: $754
Phosphates this quarter: $1013 (This strong upward price momentum leveled off toward the end of the quarter, causing the average realized price to fall slightly below Mosaic's guidance range)
Phosphates price guidance for next quarter: "Mosaic's average DAP selling price, FOB plant, for the second quarter of fiscal 2009 is estimated to be between $1,020 and $1,080 per tonne.

So after increasing 150% year over year, phospates pricing is leveling off but still projected to be at a slight increase over the current quarter next time around. Was the expectation that phosphates was going to $2000 next year? I thought the stock's 50%+ drop in 3 months was compensating for this, but I am wrong on that take based on the negative reaction to the report. If prices stay in a 20% band +/- in the next few years the level of cash flow created will be immense. And this is no longer priced as a "growth stock" - so again, 5 or so PE ratio should compensate - but I guess expectations were STILL too high even after the enormous drop in stock price.

The one thing that is definitely not a good thing in the short run is the following comment

Mosaic intends to reduce planned phosphate concentrates production by 500,000 to one million tonnes over the next several months, in response to high inventory levels.

People will panic on that, but further in the earnings report:

Inventories for phosphate producers increased from the low levels of a year ago; however, phosphate fundamentals remain positive and demand is expected to rebound once inventory levels are normalized. Momentum has slowed in the Phosphates business near-term due to the combined effects of soft seasonal demand, higher customer inventory levels and falling raw material costs. We remain optimistic about the second half outlook for phosphates and will be well positioned to capitalize on that outlook."

On to the potash side of the business

Potash 1 year ago: $164
Potash previous quarter: $335
Potash this quarter: $488
Potash price guidance for next quarter: "Mosaic's second quarter fiscal 2009 average MOP selling price, FOB plant, is estimated to be $560 to $620 per tonne."

So potash continues to increase in price and in fact unlike some end of quarter weakness in phosphates, it appears the current quarter it showing even higher prices than the previous. This should be no surprise considering the spot price for potash is double what Mosaic was contracted at this current quarter. Again, we show no weakness in potash and invesntories are at record lows. The problem for Mosaic is phosphates is 2.5x as big a business as potash. But again, the phosphates business is growing incredibly year over year and even a 'flattening' of pricing would derive a huge cash cow.

Natural gas has dropped 40+% since last quarter, crude oil has dropped 30% since last quarter, while phosphates has increased nearly 35% (but flattened towards the tail end of rhe quarter), yet the stocks in all these subsectors of commodities have all been treated the same. It is what it is but again, the stock price is now lower than the 1 year ago when the prices for the products and the earnings were substantially lower. But that does not matter in a shoot first, ask questions never environment. Mosiac earnings $2.65 this quarter, and $0.69 a year ago to put it in perspective. This report actually reminds me of Apple (AAPL) in January 2008 when a disappointing earnings dropped the stock enormously but I believe it was at a near 30 forward PE ratio at the time. Mosaic now approaching 4.

Not that fundamentals matter but some other metrics

Net sales in the first quarter of fiscal 2009 were $4.3 billion, an increase of $2.3 billion, or more than double the amount in the same period a year ago.
Operating earnings were $1.5 billion, or 36.0% of net sales, up from $449.6 million, or 22.4% of net sales last year.
Net unrealized mark-to-market derivative losses impacted gross margin by $114.8 million, or $0.18 per share, compared to net unrealized derivative losses of $30.1 million, or $0.05 per share, a year ago.
Cash flow from operating activities was $561.5 million for the first quarter of fiscal 2009 compared to $438.4 million last year.
Mosaic's gross margin for the first quarter fiscal 2009 was $1.6 billion, or 38.1% of net sales, compared with $521.8 million, or 26.0% of net sales, a year ago
Mosaic also recognized a foreign currency transaction gain of $86.7 million. These positive factors were partially offset by higher raw material costs in the Phosphates segment, increases in Canadian resource taxes and royalties in the Potash segment, and aggregate net unrealized mark-to-market derivative losses of $114.8 million primarily in the Potash and Phosphate segments.

Phosphates detail

These price increases more than offset a 7% decrease in sales volumes to 2.1 million tonnes, higher sulfur and ammonia costs, and net unrealized mark-to- market derivative losses of $74.6 million. The decline in sales volumes was primarily due to North American customer carry-over inventories from this Spring.

Potash details

The increase in operating earnings was primarily a result of higher selling prices. This increase was partially offset by significantly higher Canadian resource taxes and royalties, net unrealized mark-to-market derivative losses of $41.8 million, and the impact of a 9% decrease in sales volumes.
The Potash segment's total sales volume was 1.9 million tonnes for the first quarter which was lower compared with year-ago first quarter volume of 2.1 million tonnes. The decline in sales volumes was primarily due to lower beginning inventory levels available to meet customer demand, despite comparable production volumes.

Since Cash is King of late

Mosaic ended the first quarter with $2.2 billion in cash and cash equivalents. Cash flow from operating activities in the first quarter of fiscal 2009 was $561.5 million, up from $438.4 million a year ago. Mosaic's total debt as of August 31, 2008 was $1.5 billion compared to $2.2 billion as of August 31, 2007.

Outlook

Inventories for North American potash producers declined to record low levels in August 2008 and strong global demand continues for potash. Inventories for phosphate producers increased from the low levels of a year ago; however, phosphate fundamentals remain positive and demand is expected to rebound once inventory levels are normalized.
Phosphate sales volume guidance for fiscal 2009 has been reduced to a range of 8.0 to 9.0 million tonnes, with the majority of the reduction expected in the second fiscal quarter.
Potash sales volume guidance for fiscal 2009 is unchanged at 8.2 to 8.6 million tonnes.

So it is what it is - the bears will have multiple arguments now. They can say the phosphates business is now dead and going back to 2004 levels. They can say the company says this is a 1 time hiccup (phosphate inventories) and only 2nd quarter volume will be impaired, but the company has no clue and this is a clear sign of demand destruction (but why only in phosphates and not potash?) and the game is over. Even though phosphate pricing is still up 35% since the previous quarter. They can say earnings guidance for 2009 is garbage and needs to be cut significantly. Maybe it is all true. Somehow I doubt that but really in this type of market you cannot even make a tiny misstep and this will be considered a large misstep so we're going to be taking bitter medicine.

For May 2009 Mosaic had an estimate of $13.99 going into today; this quarter estimate was $2.94. They missed this quarter by about 30 cents, and we'll assume a similar miss next quarter on $3.40 as potash strength offsets (ahem) "weakness" on phosphates. And the same for the following 2 quarters so - $1.20 of a miss for the year. This brings Mosaic down to $12.80 EPS for their "year end" of May 2009. In after hours the stock is being demolished, down below $55 ... this will give the stock a Price Earnings of 4.3 on my lowered estimate of May 2009 earnings.

Now I will be open to any arguement for the following year (2010); spot potash is currently at $1000+ so even at the guidance of $560 to $620 for the coming quarter, Mosaic should easily be able to get to $700-$800 in potash prices in their "2010" (June 2009 to May 2010) year. Phosphates is an open question since it fluctuates far more - could be the same as this quarter, could be lower by 20%, could be higher by 20% by the time we get 12 months out. I don't know, no one knows. The bear argument I suppose is it could drop by 50% by then? Again, if the world no longer needs food I'll buy that... otherwise, not so much.

Next year analysts are in for $16.90 - with potash supply and demand favorable until 2011+, and assuming the rest of the world actually continues its modernization and urbanization in 2010+ (i.e. everyone who moved to a city does not go back to farming) a $13-$15 range for 2009 should still be very doable. If you just repeated this current quarter 4x with no growth you are looking at $10 as a floor as EPS for "2010".

So bear case $10 - mid case $13 - bull case $15+

Obviously the question is what PE ratio do you apply for a commodity stock whose growth is "slowing". Bears will argue once the growth slows it deserves to have a punishingly low PE ratio. We are currently at 4 for the year ending May 2009 and 4.3 by lowered estimates for May 2009. I guess I cannot rule out a 2 or 3 PE ratio anymore. I was joking about that before but anything is now possible.

So again, this type of analysis is useless right now - much like Apple was pole axed as the "end is near" trade happened in that name last winter when the lemmings were not satisfied so will this one be. I'd have a much more negative view if you told me phosphates were going to drop 30-40% in price and Mosaic was trading at a 25 multiple... but even a 35% drop in phosphates pricing would take pricing ALL the way BACK to.... last quarter's pricing. And the company is forecasting a slight uptick in phosphates pricing next Q, not any drop at all. Most stocks trading in the $50s, $60s, $70s don't have $12, $13, $14 worth of EPS behind them, but this is not most markets and you cannot disappoint the horde in a market absent of logic.

I was hoping for a buyback announcement but instead Agrium (AGU) announced one - figures.

And with that, we are switching to a portfolio of Wells Fargo and homebuilders which can do no wrong. Every commodity or global growth stock now seems headed to single digits. Or so says the market.

Long Mosaic in fund; no personal position

Did you like this article?