Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Mosaic (MOS), the producer and marketer of concentrated phosphate and potash crop nutrients, ended Tuesday's trading session with losses of up to 4%. The company reported a disappointing set of first quarter results for its fiscal 2013.

First Quarter Results

Mosaic reported first quarter revenues of $2.51 billion, down 19% compared to last year's revenues of $3.08 billion. Revenues missed analysts consensus of $2.68 billion.

The company reported net earnings of $429 million, down from $526 million last year. Earnings per share fell from $1.17 per diluted share last year to $1.01. On average, analysts expected the company to earn $1.15 per share.

The fall in revenues and earnings was driven by lower phosphate volumes and prices.

CEO Jim Prokopanko commented on the results:

The long-term outlook for crop nutrition is outstanding, and Mosaic is well positioned as the world's largest potash and phosphates producer. Drought and other weather-related issues in several of the world's key agricultural regions severely impacted this year's corn, soybean and wheat crops and provided a vivid reminder of just how tenuous global food security is. Our products are essential in helping the world grow the food it needs.

Segmental Information

Phosphates

Mosaic's phosphate division saw a weak quarter despite tight market conditions. Mosaic operated with low levels of inventory and suffered from supply outages. Production came in at 2.7 million tonnes with average selling prices of $529 per tonne. As such, revenues fell 30% on the year to $1.6 billion. Last year, the unit reported production of 3.2 million tonnes, at average selling prices of $576 per tonne.

Production output was impacted by longer maintenance periods and shut-downs caused by hurricanes. Operating earnings of the unit fell 38% to $208 million as sales volumes and prices fell short of levels achieved last year.

Potash

The potash division slowed production during the quarter in a response to soft demand in India and China. The company continues to expect strong demand as inventories are declining in the U.S. Production came in at 1.9 million tonnes, for an average selling price of $444 per tonne. Sales were up 10% compared to last year, totaling $960 million for the period.

Operating earnings for the unit improved by 4% to $416 million. Selling prices remained constant and sales volumes improved from last year's production of 1.8 million tonnes.

Outlook

For the second quarter of 2013, Mosaic expects sales volumes for the Potash segment of 1.6 to 1.9 million tonnes. The realized MOP price for the second quarter is expected at $420-$450 per tonne. Phosphate sales are expected to come in between 3.0 to 3.4 million tonnes, with expected realized prices to come in between $520-$550 per tonne.

For the full year of its fiscal 2013, the company assumes capital spending of $1.5-$1.8 billion for the brownfield expansion plans at the Saskatchewan mining sites.

Valuation

Mosaic ended its first quarter with $3.8 billion in cash and equivalents. The company operates with $1.1 billion in short- and long-term debt, for a net cash position of $2.7 billion. For the full year of 2012, Mosaic reported revenues of $11.1 billion. The company net earned $1.9 billion, of $4.42 per diluted share.

After Tuesday's 4% decline, the market values the firm at $23.7 billion. This values the operating assets of the firm at $21 billion. Based on the full year results of 2012, the market values the operating assets at 1.9 times annual revenues and 11 times annual earnings.

The valuation of Mosaic compares to a revenue multiple of 4.3 times for Potash Corp/Saskatchewan (POT), which trades at 15 times annual earnings.

Currently, Mosaic pays a quarterly dividend of $0.25 per share, for an annual dividend yield of 1.8%

Investment Thesis

Year to date, shares of Mosaic have risen some 10%. Shares quickly advanced from $50 in January towards $60 in February and March. Shares fell back to $45 in May amidst worries about a global economic slump, but recovered to $60 in recent weeks. Currently, shares are changing hands at $55 per share.

Shares of Mosaic have seen a wild ride in recent years. Shares peaked at $150 halfway through 2008, but fell to lows of $30 by the end of that year. Shares recovered to $85 in the beginning of 2011, before falling back again. Between 2009 and 2012, annual revenues rose from $10.3 billion to $11.1 billion. Net income fell from $2.4 billion to $1.9 billion over the same time period, as earnings per share fell from $5.26 to $4.42.

Investors are not cheerful about the first quarter report. The market is disappointed by a 30% decline in phosphate revenues, despite "tight" market circumstances. Supply problems caused by maintenance and hurricanes were to blame. While phosphate sales are expected to rebound in the second quarter, investors are not happy with the uninspiring outlook for potash sales volumes and prices.

Mosaic's CEO Jim Prokopanko is quick to point out the rosy long-term prospects of the business. However, such comments provide little relief on the short-term for investors. Shares seem fairly valued, but investors are fearful of the high volatility in production and profitability levels in the short-term.

While I see long-term rosy prospects ahead, I see few triggers for a sustained uptrend in the short-to medium-term. I remain on the sidelines and wait for a further pullback before considering initiating a long-term position.

Source: Mosaic: Wait For Pullback To Place Long-Term Bets