The Mosaic Company's (MOS) stock is up 3.3% since we last wrote a report on it. MOS released its 2Q FY13 earnings on Friday. The company reported 2Q adjusted earnings of $1.05 per share, beating consensus estimates of $0.93 by ~13%. The EPS was adjusted for one-time items including $179 million ($0.42 per share) gain from a tax benefit adjustment. Stronger than expected North American shipments drove the beat, partially offset by lower phosphate profitability.
The company reported 2Q FY13 EBITDA of $707 million, beating consensus estimates of $668 million by 6%. Mosaic's CFO declined Y/Y to $322 million from $518 million a year ago; however, the net cash remains strong at $2.4 billion.
Post 2Q results, the company's liquidity position remains strong, it should continue to fund expansion projects and enable MOS to return significant cash flow to shareholders, via share buybacks, once Cargill restrictions expire in May this year.
Total potash shipments of 1.5 million tons were better than the company's guidance of 1.3 to 1.4 million tons it provided in November last year. The stronger North American demand was the reason behind higher than expected shipments. "In North America, we experienced a strong fall season that lasted longer than expected", the company said in a press release.
Average realized price of $443 per ton for potash was in line with the company's guidance of $435 to $450 per ton. Although, the potash segment's gross profit of $355.4 million declined 10% Y/Y, the gross margin of 46% came at the high end of company's guidance of low to mid 40 percent range and was higher than the sell side expectations largely due to stronger North American demand.
The potash segment had an operational capacity of 86% for the quarter compared to the November revised guidance of 80%.
Total phosphate shipments of 3 million tons were in line with the guidance of 2.9 to 3.1 million tons. Average price of $544 per ton was at the high end of the guidance range of $535 to $550. Phosphate segment gross profit declined 33% Y/Y to $318 million. Moreover, the company is expecting a sequential decline in shipments as delayed purchase behavior persists. We think the phosphate market could stabilize by 2Q13 as India buys again and US seasonal demand returns.
"The global phosphate market appears to be in balance, with steady demand and reported U.S. producer inventories at historic averages," the company said in a press release. "Domestically, we've seen very strong shipments for fall application. Additionally, low Mississippi River levels are presenting logistical difficulties and consequently creating a sense of urgency to ensure product availability for the spring".
The phosphates segment had an operational capacity of 76% for the quarter compared to the November revised guidance of 70%.
Largely due to the ongoing uncertainty around timing, price, and volume of the Indian contract this year, Mosaic has reduced its 2013 global potash shipments forecast by 3 million tons. The company now expects shipments to total 55 to 57 million tons down from earlier estimates of 58 to 60 million tons. As we said in our last report, with declining inventories and no domestic production India needs to buy, it's just a matter of time. However, uncertainty remains around the volume of the contract. The company expects India to sign a contract by the end of 1Q13. Mosaic forecasts 3Q FY13 potash shipments of 1.5 to 1.8 million tons at an average price of $370 to $400 per ton.
The company has also lowered its 2013 global phosphate shipments forecasts to 63 to 65 million tons from earlier estimates of 64 to 66 million tons. For 2Q FY13, MOS expects total phosphate shipments of 2.5 to 2.8 million tons with DAP of $485 to $515 per ton. Although phosphate prices are moving lower, the company still expects sequential gross margin to be flat implying lower costs.
The strong potash shipments, particularly North American shipments, and a positive potash outlook post china contracts are constructive for the stock. We expect India and other regional buyers to settle contracts soon. The trend in the phosphate pricing remains weak but we see Mosaic's ability to control costs and maintain phosphate margins in a weak pricing environment as an important advantage. As the company mentioned in its press release the domestic stocks of phosphate remain low, and we expect the healthy spring demand to support a rebound in pricing.
As the risk associated with the company's quarter and guidance are now out of the way, the focus now shifts to the key upcoming catalyst, the balance sheet opportunity. We believe the company will use the liquidity to buy back stock once the Cargill restrictions lift in May.
We still think Mosaic is an attractive investment especially as the outlook for 2013 demand becomes takes shape. The stock is trading at $58.6 up more than 3% after the earnings release. MOS has a price to earnings (P/E) ratio of 13.8 and a forward P/E of 10.8.
We recently published a detailed report, including operational and financial analysis of MOS, on Seeking Alpha, please click here to read.
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