Wednesday, January 9, 2008

Mosaic (MOS) with another Excellent Quarter

And the hits just keep coming from fertilizer stock Mosaic (MOS). This is essentially going to be a carbon copy post to the comments I made in October during the last round of earnings [Mosaic Off to a Strong Start this AM Based on Earnings] AND [More Color on Mosaic Earnings]
  • The Mosaic Company (NYSE: MOS - News) announced today net earnings of $394.0 million, or $0.89 per share, for the second quarter ended November 30, 2007. These results compare with net earnings of $65.9 million, or $0.15 per share, for the same period a year ago.
  • Net sales in the second quarter of fiscal 2008 were $2.2 billion, an increase of $673.4 million, or 44% compared with the same period a year ago.
  • Mosaic's gross margin for the fiscal 2008 second quarter was $623.1 million, or 28.4% of net sales, compared with $160.5 million, or 10.5% of net sales a year ago.
  • The increases in gross margin and operating earnings were primarily the result of higher selling prices for phosphates and potash and realizing the benefit of favorable industry conditions in the Offshore segment.
  • "Our unprecedented operating cash flows have allowed us to prepay $1 billion of long-term debt over an eight-month period and we are on track to deliver strong results in fiscal 2008 and beyond," Prokopanko added.
Not much to add here folks from what I keep repeating with this group - beat analysts estimates of $0.73 by $0.16, tremendous revenue growth year over year, a fixed cost model where almost every dollar in increased price goes to the bottom line, hence explosion upward in gross margins, cash flow massive, debt being reduced at a rapid pace, etc etc etc.

Some more details by product line

  • Net sales in the Phosphates segment were $1.2 billion for the second quarter, a 61% increase compared to a year ago. The second quarter gross margin was $397.6 million, or 32.3% of net sales, compared with $35.9 million, or 4.7% of net sales, for the same period a year ago. Operating earnings were $346.8 million compared with $5.1 million for the same period last year. The sales, gross margin and operating earnings increases were primarily due to the significant increase in selling prices partially offset by higher costs for sulfur and ammonia.
  • The average second quarter DAP price, FOB plant, was $417 per tonne, which is a $174 per tonne increase compared with a year ago and a $10 per tonne increase compared with the first quarter of fiscal 2008. Fertilizer and feed sales in the Phosphates segment were 2.3 million tonnes for the second quarter, comparable with volumes of a year ago. Sales volumes to North American customers increased 70% during the second quarter as this region exhibited strong demand recovery and growth from year ago levels. Sales volumes to international customers declined approximately 25%, principally due to the increased volumes sold in North America.
  • Net sales in the Potash segment totaled $431.6 million for the second quarter, an increase of 23% compared with a year ago. The Potash business' gross margin increased to $175.2 million in the second quarter, or 40.6% of net sales, compared with $88.4 million a year ago, or 25.1% of net sales. Operating earnings were $161.2 million during the second quarter, an increase of $83.0 million, or 106%, compared to the same period last year. Sales, gross margin and operating earnings increased primarily as a result of the higher selling prices, partially offset by additional costs this year to manage the brine inflow at the Esterhazy potash mine.
  • The average realized potash price, FOB plant, increased to $171 per tonne in the second quarter, up $29 per tonne compared with a year ago and $11 per tonne compared with the first quarter of fiscal 2008. The Potash segment's total sales volumes of 2.0 million tonnes during the second quarter were 3% higher than last year's second quarter volumes.
  • Phosphate and potash fundamentals remain exceptionally strong. Phosphate and potash prices increased to even higher record levels at the end of 2007 and this momentum is anticipated to continue into 2008. Further increases in grain and oilseed prices during the last several weeks have bolstered farm economics worldwide and solidify strong nutrient demand prospects for 2008.
  • In the case of potash, supply continues to struggle to keep up with accelerating demand as evidenced by the extremely low stocks held by North American producers at the end of the fall season. This situation likely will persist until additional capacity comes on line during the next few years. Market prices are continuing to increase significantly for shipments into all major markets during the first half of 2008.
  • The phosphate situation is similar to that of potash. U.S. producers reported holding the lowest inventories of DAP/MAP in modern history at the end of the North American fall season. More importantly, large increases in market prices for phosphate rock and phosphoric acid in 2008 will dramatically boost costs for non-integrated producers who likely account for almost one-third of global phosphate production. These increases, plus substantially higher sulfur costs underpin higher phosphate selling prices. Finally, phosphate exports from China likely will drop this year due to government policies to make more product available for local farmers.
  • "The market environment remains extraordinary. Agricultural commodity prices continue to increase to unprecedented levels, resulting in robust farm economics and nutrient demand prospects," said Jim Prokopanko. "Mosaic's leadership position in Phosphates, combined with our exceptional Potash business and our focus on effective operational execution, offers a unique value proposition for crop nutrition customers and investors."
If those last 4 data points don't convince investors, then I give up. With the stock market so putrid, there is no need to rush into the name right here as it is sitting right near its 20 day moving average. But if the market goes into free fall, this is the name I will be loading up and if we get a drop to the 50 day moving average $79), I see Mosaic going right back to the top position in the fund where it has sat for most of the previous quarter. General market weakness which cuts down the price of the "best stocks in the market" is exactly the opportunity that leads to outsized gains over the long run. Any weakness in this name is a result of the market, nothing to do with the company's fundamentals - we have everything we want, a wonderful macro theme for the company, strong pricing, future strong pricing, a constrained potash market (inability to expand production) etc etc etc. Go team Mosaic. Expect a carbon copy from Potash (POT). And expect me to keep pushing fertilizer for a long time. At SOME point in the future analysts will push up expectations much too far and one of these companies will miss, and investors will flee en masse in a short sighted move... that of course is always the danger. But it won't mean the fundamentals have changed... remember, 3 nutrients in fertilizer; one being potash which must be mined and takes a long long time to bring new supply online [Potash Expands Mine for $2 Billion] - only 3 companies in the world are "investable" choices for US investors. This is the type of situation we hope for - a major shortage with no easy or quick or cheap solution. While I think these ethanol bills are a total outrage and political pandering at its worst, at least as investors we can make some money off this ridiculous situation.

I've added more Mosaic here around $90 to add to yesterday's buys in the high $80s. This takes the position back up to 3.3% of the fund. If we are fortunate enough to see a fall to $79 or so, I will make this a 6-8% type of position. Analysts estimates for next year are now up to $5.40, up from $3.55 90 days ago. I think it's still too low. I wrote in October [Analysts Still Doubting the Fertilizer Stocks] and showed how wrong they have been... and I contend continue to be. These estimates are going up, and once the market returns out of panic mode, so will these stocks. Folks, this is 17x next year's earnings for the type of secular growth we have in almost no other sector in the market. Still dirt cheap despite a massive run in 2007. That doesn't mean the stock can't fall $10 tomorrow or next week, but again this will be a function of a panicky market and it will be an opportunity to take advantage of.

Long Mosaic, Potash in fund; long Mosaic in personal account

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