Skip to main content

Mosaic Co (NYSE:MOS) 1Q2017 Earnings Preview

Mosaic (NYSE:MOS) will announce its 1Q2017 (Jan - Mar 2017) earnings on 2 May 2017, BMO.

The consensus earnings expectation for this quarter is $0.22, with a high/low of $0.70 / $0.00.

We examine the fundamentals driving the business on a QoQ basis to assess where the actual are likely to like compared to the consensus forecast.

MOS manufactures DAP & MAP (phosphates), and Potash (MOP) fertilizers. DAP/MAP manufacturing involves phosphatic rock, or phosrock, that MOS mines in Florida, along with sulfur (to manufacture sulfuric acid), and various concentrations of ammonia, to manufacture DAP & MAP.

MOP is mined primarily in Canada at MOS-owned mines, and also in a much smaller quantity, in the US, also at company-owned mines.

The price behavior of these components along with the end-products is depicted below:


Gross Margins

The key line to watch here is the sea-green one, DAP Processing Margin. That's the gross margin, the fob DAP product price less the input costs, namely sulfur and ammonia. Since the cost of phosrock has remained largely stagnant during the preceding & current quarters, one can take it out of the equation while considering the gross margin.

By inspection, it is apparent that the gross margins have remained little changed during the two business quarters, and that is indeed correct: gross margin was a shade over $228/MT during the quarter ended 31 Dec 2016, while gross margin for the Jan-Mar 2017 quarter came in at little over $226. 

Natural gas, an important feedstock & fuelstock raw material for DAP as well as for brine solution-mined MOP, had the following price pattern during the 2 quarters:


It is apparent that while there was considerable intra-quarter volatility in natgas prices, but to me it appears that the average prices would have remained little changed. However, our raw material of interest isn't natgas itself, but ammonia, which is manufactured using natgas & nitrogen, and the prices for that rose considerably QoQ, hence the small decrease in gross margins.

On balance, my contention is that that while gross margins have decreased slightly, volumetric pick-up owing to 1Q fertilizer usage being higher than 4Q, would have maintained, or may even have led to a small uptick in the NOMINAL amount of gross margins for MOS during 1Q2017 compared to 4Q2016.

FX Gains & Losses

MOS is exposed primarily to two currencies against the USD: Brazilian Real (BRL), and Canadian Dollar (CAD).




MOS is negatively exposed to USD strength vs BRL: USD strengthening vs BRL leads to FX losses for MOS. It is positively exposed to USD strength vs CAD: strengthening USD vs CAD leads to FX gains for MOS.

As can be seen above, USDBRL has weakened for much of 1Q2017, leading to FX GAINS for MOS. Likewise, the USDCAD trend was one of strengthening USD for much of the last 2 quarters, so we should atleast not expect any FX losses emanating from that currency pair for MOS.

My View

I think the GM, and the FX situation is one that leads to a small EPS BEAT: MOS will likely OUTPERFORM the consensus earnings estimate of $0.22, and will probably post adjusted EPS in the range of $0.25 - $0.30.

Fertilizer Affordability & Outlook

A LARGE factor in fertilizer demand & affordability is crop prices, particularly for corn & soybean since these are the primary consumers of fertilizers in North America & Brazil. The prices of corn & soybean during the two quarters are as below:



Well, the price action for both corn & soybean hasn't been particularly strong towards the end of 1Q2017, and this may not augur too well for fertilizer affordability going forward. However, we doubt that this will lead MOS to lower their product price/demand & earnings outlook for 2Q2017 in the upcoming earnings announcement.

Recommendation

An earnings BEAT is on the cards, albeit small. However, the price-earnings multiple (~26x) of forward earnings limits the attractiveness of a long position, in expectation of an earnings beat. The crop price declines towards the end of the quarter also lend support to cutting a long.

The pricey price-earnings ratio may appear ripe for a short, but that may be attributable to volumetric growth growing forward: the company has been making steady investments in both organic growth as well as acquisitions, so 26x FPE may not appear so high once those expansions kick in. That, coupled with a likely (small) earnings beat, certainly does not warrant a short.

My recommendation: cut your long, cut your short, stay neutral on earnings.

(Post not targetted towards long-term investors, but only towards short-term speculators who take positions on the basis of triggers, especially upcoming earnings).  


Comments