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Yesterday's earnings release by The Mosaic Company (MOS) confirmed our repeated recommendations of taking long positions in fertilizer stocks. Our favorite in this industry is CF Industries Holdings Inc. (CF), a fertilizer stock with high nitrogen exposure, as the Shale gas boom has benefited nitrogenous fertilizers the most. In addition, the fact that corn crops utilize nitrogen more than phosphate or potash is another reason why we recommend CF. We also recommend nitrogen MLPs like CVR Partners LP (UAN), Terra Nitrogen Co LLP (TNH), and Rentech Nitrogen Partners LP (RNF).

We continue to remain bullish about other major fertilizer players like Potash Corp (POT) and The Mosaic Company. This is because of their lucrative long-term growth prospects, in addition to the fact that the current industry dynamics are favoring them.

Review - Mosaic's Earnings Release

Yesterday, The Mosaic Company reported its earnings for 4Q2012. Although its revenue dropped to $2.82 billion, a dip of 1% relative to the last year, it still exceeded analysts' expectations by more than 10%. The earnings-per-share were 3.5% higher than the Street's forecast of $1.15, although they were 26c lower than last year's $1.45.

The company attributes the YoY decline in revenues and earnings to lower phosphate pricing, which dropped from $574/metric tons last year to $494/metric tons. However, the impact is not that severe, as potash (one of the two main products of the company, the other being phosphate) prices increased by 12.6% to $455/metric tons over the same period.

The U.S. Midwest drought, which is decimating grain yields, especially corn and soybean, will lead to a temporary dip in the demand for MOS' prime products, as their application will decrease. However, for the next one or two years, the company believes that farmers will "have their foot on the accelerator" with regards to producing more grain, which will more than reverse the temporary dip in demand. In addition, the management expects that the impact of this demand dip will not be that severe, thanks to the "global reach" of the company.

In fact, the rise in grain prices due to this drought is expected to lead to a higher price for fertilizer imports to be paid by China, which is the largest potash consumer in the world. As according to Mosaic CEO Jim Prokopanko, "The more grain is worth, the more fertilizer is worth."

The company also announced a 100% increase in its dividend from its current level of 50c/share. Cash flow from operations surged from $973 million last year to $1.2 billion, primarily due to "decreased North American phosphate inventory and increased customer prepayments".

Consequently, share prices of major fertilizer companies increased amidst expectations of a strong market outlook for this industry.

Source: Why We Were Right On The Mosaic Company