Commodities & Metals

Mosaic Misses A Low Bar, Yet Holds Up (MOS)

The Mosaic Company (NYSE: MOS) was one stock where we noted that the bar for earnings expectations was  very low.  The fertilizer and potash player came even lower.  It posted $0.23 EPS rather than $2.65 EPS a year ago and under the $0.35 EPS target.  Quarterly revenues were down 66% to $1.5 billion, versus $2.9 billion a year ago and versus estimates of $1.54 billion.  It ended the quarter with cash and cash equivalents of $2.6 billion as of August 31, 2009, but the business metrics are soft despite it trying to talk up long-term demand.

Gross margin was 15% of net sales, down from 38% of net sales a year ago, based upon “significant declines in market selling prices for phosphate and potash sales volumes combined with lower potash selling prices.”

As far as guidance, sales volumes for the Phosphates segment are expected to range from 1.8 to 2.2 million tons for the second quarter of fiscal 2010, while realized DAP price, FOB plant, for the Q2-2010 period should be $265 to $305 per tonne.  The company is not offering any financial guidance in the potash sales until market conditions normalize.

Mosaic said that phosphate sales volumes in the first quarter were comparable to levels a year ago, but noted that the decline in potash sales volumes and selling prices continues to be related to cautious purchasing by customers.

The phosphates segment sales were down to $814.4 million from $2.6 billion a year ago.  Phosphates sales volumes were comparable with a year ago at 2.1 million tonnes but average prices were sharply lower.

Potash segment sales came to $333.3 million for the first quarter from $976.4 million a year ago on a sharp decline in sales volumes, the effects of significantly lower operating rates on fixed cost absorption and a decrease in the average prices.  Mosaic said that it continues to operate at lower production rates and will do so until demand improves.

Its offshore segment sales were down to $468.1 million from $1.0 billion a year ago due to lower selling prices.  Mosaic ended the first quarter with $2.6 billion in cash and cash equivalents, while cash flow from operating activities was $172.4 million (down from $561.5 million a year ago) due to lower net earnings and significant working capital changes. The company said that it cut its debt to about $1.4 billion from $1.5 billion a year ago.

While it tries to offer high hopes ahead, the company noted that farmers have reduced crop nutrient applications globally this season and are drawing down the nutrient levels banked in their soils, but that farmers are likely to boost application rates “in response to high 2010 new crop prices and the need to replenish the large amount of nutrients withdrawn by the record crop this year.”

The good news here is that the after-hours reaction was less harsh than it could have been.  We saw a near-0.5% drop today to $45.96, and shares are trading down only 0.6% at $45.65 in the after-hours session.  With all of the lowered guidance in the sector, it seems this was priced in even if it is under a very low-set bar.

What remains is the notion of a continued global expansion or the notion of a double-dip recession.  The recovery is barely under way and we have seen many calls for the market to roll over again. Despite poor performances compared to the boom, the valuations here when you back out cash seem fair.  But that also takes into consideration a normalization of earnings rather than a resumption of a global decline.

JON C. OGG

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