Mosaic earnings say it's still too early to buy fertilizer stocks

07/17/2013 6:40 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Mosaic’s (MOS) fiscal fourth quarter earnings report, released on July 16, sums up the problems facing global fertilizer producers. The company reported strong sales by volume for phosphate and potash fertilizers—in fact 2013 now looks like it will set a record for sales volume for potash. But earnings fell to $1.14 in the period from $1.19 in the fiscal fourth quarter of 2012 and sales dipped to $2.7 billion from $2.8 billion in the 2012 quarter on a drop in realized selling prices.

If you’re looking for high sales volumes to drive up prices, it’s clear from Mosaic’s conference call that you’ve still got a wait ahead of you. The company continues to see new capacity come on line from expansion projects begun five years ago. So that even though Mosaic is now delaying the next stage of its expansion, 2013 is still witnessing expanded production capacity at the company.

That mirrors that situation for the global industry as a whole. In 2011 the fertilizer industry had $88 billion in 250 projects to expand capacity scheduled by 2015. Those plans would have added 17% to 25% to global capacity for nitrogen fertilizers by 2015 and 42% to potash capacity by that year. In 2010 global demand was forecast to grow by 2% to 3% annually.

Some of those 250 projects have been cancelled but not enough.

You can see that reflected in price trends over the last year and projections for next quarter by Mosaic. The company’s realized price this quarter for potash fertilizers was $368 a metric ton. That was below the mid-point of the company’s guidance for $350 to $380 a metric ton. For the next quarter Mosaic is looking for $330 to $360 a metric ton, slightly lower than in the just completed quarter. In the quarter a year ago the realized price was $455 a metric ton

The best the company was able to say in its conference call about the future was “We expect the current price weakness to moderate over time, as demand growth absorbs the additional supply of phosphate and potash.” That, unfortunately, has been the industry mantra for quarter after quarter in recent years. Mosaic has reported earnings of $4.47 a share over the last four quarters. For fiscal 2011, which ended in May 2011, the company reported earnings of $5.62

In other words, these results say, don’t get carried away by current high grain prices—those prices look like they’re headed down on what is shaping up as a record harvest in North America—and don’t get carried away by the jump in farm incomes a record harvest will bring. The problem of excess capacity still hangs over fertilizer stocks.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of any stock mentioned in this post as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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