Mosaic (MOS) with Blow Out Earnings

Coal down, fertilizer to go...

blah blah, there is panic in the air, Mosaic (MOS) said volume targets of potash would be hard to reach for 2009, end of the world - pricing power will go away, valleys of corn will spring up throughout the world, competing with wheat, and Kool Aid will rain down from the heavens - instead of making $14 in 2009 they might make $13.25 - growth will slow from 150% to 90% and the end of the story is afoot - please give me my pacifier. Mosaic beats by 24 cents but again, who cares - let's go get us some financials that only lost $3.27 instead of the anticipated $3.87 and came in "better than expected". Fertilizer is SOoooOOoo 2007.

This company is selling potash @ $355 per tonne this quarter and the the whining is launching from the rafters because volumes won't ramp up in 2009 - meanwhile pricing is exploding - but that's ok, it's all priced in and time to get some Kohls (KSS). That 2nd half 2008 recovery... err 1st half 2009 recovery is just around the bend.

[Mar 27: Canpotex Potash Contracts Secured with India @ $625]
[Apr 2: Potash Makers Already Talking $750, up from $625]
[Apr 16: Chinese Agree to $576 Price Point for Potash]
[Apr 23: Potash Hits $1000 on Spot Market]

• The Mosaic Company (NYSE: MOS - News) announced today net earnings of $862.5 million, or $1.93 per share, for the fourth quarter ended May 31, 2008. These results compare with net earnings of $202.6 million, or $0.46 per share, for the quarter ended May 31, 2007.
  
• Net earnings for Mosaic's fiscal year ended, May 31, 2008, were $2.1 billion, or $4.67 per share, compared with $419.7 million, or $0.95 per share, in fiscal 2007.
• Net sales in the fourth quarter of fiscal 2008 were $3.5 billion, an increase of $1.8 billion, or nearly double the amount posted in the same period a year ago.
• Mosaic's gross margin for the fiscal 2008 fourth quarter was $1.3 billion, or 37.1% of net sales, compared with $456.2 million, or 27.1% of net sales, a year ago.
  
• Fourth quarter operating earnings were $1.2 billion, compared with $359.8 million for the fourth quarter in fiscal 2007. (that's not a typo - it's simply a sickeningly staggering increase)

Remember, the nitrogen business is exiting stage left [Jul 15: Mosaic Sells Nitrogen Plant to Yara International for $1.6 Billion] so we'll focus on the 2 nutrients that make Mosaic one of our favorites.

Phosphates

• Net sales in the Phosphates segment were $2.0 billion for the fourth quarter, which more than doubled net sales of $959.7 million a year ago.
  
• Phosphates' fourth quarter gross margin was $851.6 million, or 41.8% of net sales, compared with $266.9 million, or 27.8% of net sales, for the same period a year ago.
  
• Operating earnings were $797.4 million compared with $234.3 million for the same period last year.
  
• Operating earnings growth in the fourth quarter of fiscal 2008 was driven by significant increases in selling prices and a 5% increase in sales volumes to 2.4 million tonnes.
  
• These positive factors were partially offset by higher sulfur and ammonia raw material costs.
• The average fourth quarter DAP price, FOB plant, was $754 per tonne, which is a $416 per tonne increase compared with a year ago and a $267 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise, as do raw material costs.

Potash

• Net sales in the Potash segment totaled $860.5 million for the fourth quarter, an increase of 74.2% compared with a year ago.
  
• The Potash segment's gross margin increased to $342.4 million in the fourth quarter, or 39.8% of net sales, compared with $174.8 million a year ago, or 35.4% of net sales.
  
• Operating earnings were $331.3 million during the fourth quarter, an increase of $169.1 million, or double compared to the same period last year. The increase in operating earnings was primarily a result of the higher selling prices.
  
• This increase was partially offset by significantly higher Canadian resource taxes and royalties, the impact of a 4% decrease in sales volumes and a stronger Canadian dollar on operational costs. (wait, they had a 4% decrease and still posted blowout numbers? wow... better sell this off because 2009 is going to be flattish in volume, even as prices more than double next year)
  
• The average fourth quarter MOP price, FOB plant, was $335 per tonne, which is a $181 per tonne increase compared with a year ago and a $114 per tonne increase compared with the third quarter of fiscal 2008. Realized prices at the end of the fiscal 2008 fourth quarter were significantly higher than the average for the quarter and continue to rise.
• The Potash segment's total sales volume of 2.4 million tonnes was at the high end of Mosaic's guidance range for the fourth quarter and compares with last year's fourth quarter volume of 2.5 million tonnes. The reduction in sales volume compared with the year-ago quarter was primarily due to the lack of sufficient inventory to fully meet customer demand. (there are worse problems to have than having so much demand you cannot fulfill it all, but someone will twist this into an End of Days scenario - even though these guys say the same thing every time they open their mouth)

Industry Outlook

• Global grain and oilseed stocks remain at low levels despite record crops in 2007 and 2008. The latest USDA statistics released on July 11, 2008 show that inventories of the sixteen leading grain and oilseed crops will increase a measly (you do this long enough and see the first occurance of the word 'measly' in an earnings report - hah) 4.4 million tonnes this year and stocks as a percentage of use will decline to the lowest level since the early 1970s. (but... but...crude oil is down $20 and could go to $110!! no one needs fertilizer in that environment - CNBC told me)

Financial Outlook (this is the "scary" stuff - better take this name back to $20 - the story is over)

• Sales volumes for the Phosphates segment are expected to range from 9.0 to 9.4 million tonnes for fiscal 2009. This increase is contingent upon sourcing an adequate supply of sulfur, operating mine and plant sites at high operating rates, and restarting certain previously indefinitely closed phosphoric and sulfuric acid production in the second half of the fiscal year. The restart of this phosphoric and sulfuric acid production will permit Mosaic to utilize excess granulation capacity at one of its existing plants.
• Potash segment sales volumes are expected to range from 8.2 to 8.6 million tonnes in fiscal 2009. Previously announced potash capacity expansion projects will be underway in fiscal 2009; however, production from the first of the expansions will not come online until fiscal 2010. This volume estimate assumes, among other things, operating the potash facilities at high operating rates and continued successful management of the brine inflow at the Esterhazy mine. Mosaic is beginning fiscal 2009 with extremely low inventory levels, especially in Potash, compared with the inventory levels a year earlier. This will make it difficult to achieve increased sales volumes in fiscal 2009. (flat volume? the horror - stock cannot be worth more than $24 - 2x forward earnings at most)
  
• Mosaic's realized DAP price, FOB plant, for the first quarter of fiscal 2009 is estimated to be $1,020 to $1,080 per tonne. (vs this quarter $754 - better sell this stock, the rate of growth cannot continue - End of Days is here, I mean at 25% sequential growth from here to 2011 fertilizer will cost more than platinum but that's ok - we demand this pace continues or the stock will be sold to $18) Partially offsetting the benefit of these higher projected prices will be higher raw material costs, principally ammonia and sulfur.
  
• Mosaic's first quarter fiscal 2009 average realized MOP price, FOB plant, is estimated to be $460 to $510 per tonne (vs this quarter $335 - again the rate of growth is unacceptable to my hedge fund's computer - the story is over - declining growth rates means the stock should go to $14 - did I just say $18? I was being generous - maybe $10 is more fair, 1x earnings seems fair). Partially offsetting the benefit of these higher projected selling prices will be higher Canadian resource taxes and royalties.
  
• Both estimates assume farmer economics remain robust and that management has accurately estimated the mix of forward versus spot sales. (well there is the rub, as oil falls to $100 or *gasp* $85, the farmer economis will be ruined. How's that? I don't know - it doesn't make sense but let me ask the super computer to come up with a thesis so I can sell the stock off)

Note sarcasm prevalent in above commentary but as you can see, the boogey men under your bed are out to get you. Folks, no company can grow at the rates these companies have on and on and on and on. Mosaic now trades at 10x next year's (too low) estimates. If this were a 40x forward PE let's talk nightmare scenarios. As growth 'slows' from 150% year over year (or 400% or whatever metric you want to use) to even half that I believe 15-20x P/E is not out of the question. And once the debt is retired, the cash spin off machine will begin. Even lousy financials are getting 9-10 PE Ratios. I believe it would not be too much to ask to share such a multiple for the fastest growing sector in all the market. I know, I know, fertilizer is a "backward looking story" and the bright light that is financials, housing, and retail is 'forward looking' so it's time to buy those! But I'm not "quite" ready to call the death knell for the industry like we'll hear this quarter, or the next, or the one after that, or perhaps the one after that. All white noise. The death knell brought to you by the same people who missed the entire story on the way up [Oct 23: Analysts Still Doubting the Fertilizer Stocks]

But... until the hedge fund computers return to the thesis we'll wait for selloffs to add, or better chart formations - just like coal. Otherwise we are just marking time.

Long Mosaic in fund and personal account