Mosaic Profits Whittle, Sunny Days Ahead

By Sham Gad | April 04, 2012 AAA

The Mosaic Company (NYSE:MOS), one of the largest fertilizer companies in the world, reported third quarter fiscal 2012 net income of $273 million which was down from $542 million in the year ago period. Net sales during the quarter were $2.2 billion which was flat with the same period last year. Shares declined by roughly 5% on the earnings news.

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Peeling the Layers
Mosaic's quarter was heavily impacted by lower potash volumes. Despite higher potash pricing year over year, a decline in sales volume sent sales down 27% year over year during the quarter. Mosaic sold 1.1 million tons of potash during the quarter versus 1.9 million tons in the year ago period. The sharp drop in volume was more than enough to offset the benefit of a higher price of $453 per ton compared with $358 per ton a year ago. The volume drop was due to farmers delaying purchases, but Mosaic management is confident that North America will have a strong spring planting season and that farmers will drive volumes higher. That means that Potash Corp (NYSE:POT), the largest producer of potash in the world, will likely experience the same short-term decline in volume. But if the long-term outlook from Potash is also as sunny as Mosaic, the sell-off could be an opportunistic opening to own high quality companies.

SEE: 5 Things To Know About Potash

Fundamentally Strong
The weak potash sales were offset by strong phosphate sales. Phosphate sales were up 13% year over year, yet gross margins declined significantly due to higher material costs and temporary yet unexpected business interruptions. Phosphate prices were relatively unchanged year over year. Looking ahead, Mosaic expects a very strong 2012 as demand for agricultural products will remain strong. Buried in the middle of the earnings report was news that Mosaic was increasing its annual dividend by 150% to 50 cents a share beginning in April. While that still leaves the yield below 1%, Mosaic has a ton of cash on its balance sheet and the company is giving that back to shareholders.

SEE: How Dividends Work For Investors

The Bottom Line
If Mosaic is right about a strong 2012, then the current sell-off may interest investors into investing in a fundamentally strong industry. Along with MOS and POT, CF Industries (NYSE:CF) and Agruim (NYSE:AGU) are the other two giants in the space. All have sold off due to a weakening in agricultural prices. But food is a must and fertilizer helps the world create more food. That means an increase in fertilizer use and ultimately earnings growth for fertilizer companies.

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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

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