Mosaic (MOS) - Excellent Report as Expected

Mosaic (MOS), as expected, provided an excellent report. The full link is here and the fertilizer companies always write very long, detailed, transparent earnings reports (unlike say, our "financially innovative" investment banks) so it's worth the read. I've posted almost the entire reports in the past, but I'll just do a summary today since I could literally copy and paste the exact same text I've done the past 2 earnings reports, just with higher numbers. [Oct 9: More Color on Mosaic Earnings] & [Jan 9: Mosaic with Another Excellent Quarter]

• Mosaic Co. said Friday its fiscal third-quarter profits grew more than tenfold as prices charged by the phosphate and potash fertilizer maker rose dramatically. The results, which beat analysts' estimates, triggered a premarket rally that lifted the stock $4.98, or 4.8 percent, to $109.50.
• Net income for the three months ended Feb. 29 jumped to $520.8 million, or $1.17 per share, from $42.2 million, or 10 cents per share. Analysts polled by Thomson Financial expected earnings per share of 95 cents. Revenue nearly doubled to $2.15 billion from $1.28 billion.
• Mosaic averaged a diammonium phosphate price of $487 per metric ton, up $241 from the year-earlier period; its muriate of potash price climbed $77 per metric ton to $221. Total sales volumes rose about 18 percent in the quarter.
• The results easily offset "significantly higher" costs for sulfur and ammonia, two primary raw materials for phosphates, Mosaic said.

The general takeaway is the same as it's always been - the pricing power is immense, margin explosion is happening, despite rising input costs. Rising input costs have been a "worry" the past few quarters, they were a "worry" this quarter, and they will continue to be a "worry" going forward - this is the "World of Shortages" scenario I talk about weekly - EVERYTHING goes up (except our government inflation reports). The key is your output goes up in price more than your inputs - which is the case in fertilizer. So the question was not the news, but the investor reaction to the news, and it appears this report calmed the nervous minions; so I will need to pay up to get back my large position - of course it stinks to have a previous 6% weighted position go up without you, but you can't have both risk aversion and return concurrently, it's either one or the other - I chose safety and will have to pay up because of that. Not a problem, because based on the new earnings estimates for 2009, Mosaic will be north of $200 a year from now. So $90, $100, or $110 is a bit of a moot point....

Now there was one very interesting piece of news that makes me EVEN MORE bullish. Mosaic is announcing they will expand capacity for potash production by 50%! This was not something that was the consensus - everyone gave a major valuation bonus to Potash (POT) because the thought that only Potash had potential to expand capacity... but if Mosaic can do as well, it's valuation should fall much more closely in line with Potash. This is a new data point, and (to me) much more important than the earnings which was already in the price. Of course it is going to take 12 years to do, but it will start in 2009 - this only highlights how large of a moat there are around potash producers - expansion is long and costly - exactly what we want to see; high barriers to entry.

• The Mosaic Company (NYSE: MOS - News) announced today a long term potash capacity expansion plan in Saskatchewan, Canada in response to continuing robust global demand for potash.
  
• The total expansions announced, together with those announced in May 2007, are expected to increase Mosaic's annual capacity by approximately 5.1 million metric tonnes at an estimated average capital cost that is significantly lower than greenfield projects. Upon completion of these expansions, Mosaic's total annual capacity will approximate 15.5 million tonnes, maintaining Mosaic as one of the premier potash companies in the world.
• The expansions are projected to occur over the next twelve years, with the first expansion production coming on line in 2009. Some of the expansions are already underway while others are in the planning and approval stages.
• In addition to these expansions, approximately 1.3 million tonnes of annual capacity will revert to Mosaic within the next few years upon the expiration of a third party tolling agreement at Esterhazy.

Again from a stock valuation perspective I cannot emphasize enough how important this is (and 98% of people in the stock today will ignore this part of the news). The fundamental reason for Potash's premium valuation vs Mosaic has been the inherent thought that over the long run, only Potash can meaningfully increase capacity. If this is not the case, which today's data seems to confirm, then the valuation gap should narrow. Meaning (a) Potash's valuation needs to fall down to Mosaic's or (b) Mosaic's needs to rise to get closer to Potash's. I am betting on the latter... so P/E multiple expansion (which we love) should happen here.

I will be adding today to the fertilizers, and be looking to continue to add on the inevitable pullbacks we get each time the market believes that "commodities are dead"....

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