Earnings Fall At Mosaic And We're Not Interested

| About: The Mosaic (MOS)

Agricultural giant Mosaic (NYSE:MOS) reported lower than expected 2013 first quarter results. Revenue fell 19% year-over-year to $2.5 billion, roughly in-line with consensus estimates. Earnings fell 14% year-over-year to $1.01 per share, significantly lower than the consensus expectation of $1.16 per share.

The primarily driver of weakness at the fertilizer giant had to do with conditions in the phosphate market. The price per tonne fell 8%, but lower volumes accounted for the lion's share of the poor performance. Overall, phosphate sales fell 30%, and gross margins remained flat at 18%. Demand wasn't particularly weak, however; the company was unable to bring ample supply to market in a timely fashion. Mosaic mostly blamed Hurricane Issac and maintenance, though it remains confident in the long-term prospects of the phosphate industry.

Potash sales were fairly strong, in our view, increasing 10% year-over-year, to $960 million. The company's gross margin fell 300 basis points to 48%, but profitability remained relatively strong. Though prices were flat at $444 per tonne, we're fans of the long-term growth prospects of potash and like the industry structure. Mosaic, Potash (NYSE:POT), and Agrium (NYSE:AGU) have a virtual oligopoly in potash production in North America and supply a great portion of the world with the critical agricultural input.

However, management noted that demand in China and India has slowed, as both countries want to renegotiate supply contracts. CEO Jim Prokopanko explained that China is determined to pay a lower rate for potash than it did during the first half of 2012, so the country hasn't imported much of the agricultural input. Importantly, Mosaic, Potash, and Agrium have a joint-venture international exporting arm, so the firm doesn't face the risk that one of its competitors cuts prices to steal the Chinese business. We suspect demand from China will recover sometime in calendar 2013.

Going forward, the firm gave pricing guidance for potash and phosphate that was roughly flat sequentially. Tonnage looks like it will increase in phosphates, but it could decrease in potash should Chinese and Indian demand remain weak. The firm remains fairly optimistic about the long-term picture in spite of global macroeconomic uncertainty. Still, shares score a 6 on the Valuentum Buying Index (our stock-selection methodology), so we aren't interested in adding them to our Best Ideas Newsletter at this time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.