Tuesday, October 6, 2009

Dry Summer for MOS

As we are stepping into one of the most crucial earning seasons in years, I am going to track the earnings of a series of companies, starting from one of the largest fertilizers producers in the world, MOS.

MOS released a disappointing earnings report after the market close yesterday. The company announced  net earnings of $100.6 million, or $0.23 per diluted share, for the first quarter ended August 31, 2009. These results compare with net earnings of $1.2 billion, or $2.65 per share, for the first quarter ended August 31, 2008. Revenue fell by 66% to $1.46 billion. Analysts had been expecting EPS of 35 cents on revenue of $1.54 billion.

  • Phosphate and Potash Prices Down Sharply. Volume Started to Stabilize
The disappointing result is attributable to sharp declines in phosphate prices, potash prices and potash sales volume. The average first quarter diammonium phosphate (DAP) selling price, FOB plant, was $276 per tonne, compared to $1,013 a year ago and $345 per tonne in the fourth quarter of fiscal 2009. Phosphates sales volumes were comparable with a year ago at 2.1 million tonnes. The average muriate of potash (MOP) selling price was $382 per tonne, compared to $488 a year ago and $540 per tonne in the fourth quarter of fiscal 2009 and total potash sales volumes were 0.8 million tonnes, compared with year-ago first quarter volume of 1.9 million tonnes, but up from 0.6 million tonnes for the fourth quarter of fiscal 2009

  • Market Reaction Down First and Up Later. USD Weaknesses Helped
Yet, the price movement of MOS depicts the all too unpredictable post- ER market reaction. The stock price went down immediately after the release in the extended hour trading but soared as much as 5% as the weak US dollar lifted the entire basket of commodities.
  • Management Optimistic on Outlook
Despite the dismal earnings release, the management keeps its optimistic tone as usual, citing expected increase in the usage of fertilizers, global economic recovery, and decreasing inventory.

The company expects farmers to increase in demand in anticipation of high crop prices in 2010 as farmers make up for under applications of fertilizers in the late 2008 and 2009. Global economic recovery is expected to continue the trend of better diet (more protein diet) in densely populated emerging markets such as China and India. Inventory of phosphate in North America is at the lowest since May 2006. Inventory of potash is also working down from its elevated level earlier this calendar year. The distribution pipeline has been largely emptied.
  • My Takes
  1. The "better diet in emerging markets" theory has been the bull case offered by the management through its boom and bust , so I don't think this is the "marginal " component that will make a difference in coming months .
  2. Very lean inventory, on the other hand, is something to get excited about as this was the most important drag on pricing power. Phosphate inventory looks good now. One down, another one to go. Inventory of Potash is a key to the sector in coming months.
  3. The optimism of management is to a large extent dependent on expected high crop prices in 2010. From the May 2010 futures contract of wheat and corn, this seems to be possible but I wouldn't get too excited until I see some real movements due to the volatility of these commodities.

In a nutshell, things are getting interesting in this sector but I would stay on the sideline until I see some real movements in either crop prices or fertilizer prices.

Disclaimer: Stocks/financial instruments mentioned in this blog are not to be taken as investment advice/recommendation. Readers must consult their own financial advisors and/or consider their own risk/reward profile before making investment/trading decisions. The blog author is not liable for any investment/trading decisions of readers should readers decide to base the decisions on information provided by the blog.

Disclosure: The blog author does not own MOS in her personal account as of October 6, 2009


bovine said...

Nice post, thanks a lot! Would you comment on the agriculture sector?

coke said...

Thanks for your comment. I am no experts in agricultural products. I just briefly touched on their data because I used to play fertilizer stocks a lot in 2007.
According to USDA report, ending inventory of corn has been declining and is getting closer to the "pre-agribubble" level. Crop prices are hovering at the bottom according to futures. I would think that 2010 will be a better year for agricultural products given that the supply continues to decline to eliminate inventory.