As we are stepping into one of the most crucial earning seasons in years, I am going to track the earnings of a series of companies, starting from one of the largest fertilizers producers in the world, MOS.
MOS released a disappointing earnings report after the market close on October 5, 2009. The company announced net earnings of $100.6 million, or $0.23 per diluted share, for the first quarter ended August 31, 2009. These compare with net earnings of $1.2 billion, or $2.65 per share, for the same period last year. Revenue fell by 66% to $1.46 billion. Analysts had been expecting earning-per-share of 35 cents on revenue of $1.54 billion.
- Phosphate and Potash Prices Down Sharply. Volume Started to Stabilize
- Market Reaction Down First and Up Later. USD Weaknesses Helped
- Management Optimistic on Outlook
The company expects farmers to increase in demand in anticipation of high crop prices in 2010 as farmers make up for under applications of fertilizers in the late 2008 and 2009. Global economic recovery is expected to continue the trend of better diet (more protein diet) in densely populated emerging markets such as China and India. Inventory of phosphate in North America is at the lowest since May 2006. Inventory of potash is also working down from its elevated level earlier this calendar year.
- My Takes
- The "better diet in emerging markets" theory has been the bull case offered by the management through its boom and bust , so I don't think this is the "marginal " factor that will make a difference in coming months .
- Very lean inventory, on the other hand, is something to get excited about as this was the most important drag on pricing power. Phosphate inventory looks good now. One down, another one to go. Inventory of Potash is a key to the sector in coming months.
- The optimism of management is to a large extent dependent on expected high crop prices in 2010. From the May 2010 futures contract of wheat and corn, this seems to be possible but I wouldn't get too excited until I see some real movements due to the volatility of these commodities.
- With continued weakness in US dollar, there is reason to be bullish in hard assets.
Disclosure: The author does not own any position in MOS at the time of writing this article.