Thursday, October 02, 2008

Mosaic (NYSE:MOS): Bounce?

Several tier-1 firms defending Mosaic (NYSE:MOS) following results announced last night:

- Morgan Stanley notes the "miss” relative to expectations came on the COGS line, as Mosaic's revenue came in above our expectations despite lower than anticipated volume. Not surprisingly given the widely reported $100 decline in DAP prices over the past month (i.e., trade magazines have been reporting prices around $1,00 per tonne for several weeks now), Mosaic is choosing to protect price by reducing DAP production during what it believes will be a limited period of demand softness. Morgan Stanley expects this move to shore up recent DAP price weakness and continues to note that on a go forward basis lower sulfur production costs are largely offsetting the current reduction in DAP prices. Importantly, potash results were inline with firm's expectation and the company made no alterations to its potash production expectation. Finally, given the global economic environment, what should not be lost in all of this is that Mosaic now has ~$700 million of net cash - a substantial cushion that makes it more than capable of matching supply with demand to protect price.

Given the present equity market environment, investors will likely be overly disturbed by the "miss" and cast a more skeptical eye on the production cut (i.e., will it be enough to maintain status quo DAP price levels?). That said, with Mosaic shares trading down ~20% in the post-market to $55 per share, they believe that a near-worst case scenario is now priced in for the balance of F2009.

Maintains Overweight and $155 tgt

- Citigroup maintains their Buy and $150 tgt noting that combining the macro environment and guidance cut, MOS shares are likely to trade-off today, but farmer economics indicate underlying farm demand for fertilizers should remain strong over the full application season. In firm's opinion, the market will have a difficult time focusing on the expanding margins until phosphate prices stabilize, which is why they view the production curtailments as a positive, since this should shorten the inventory adjustment period and tighten the market for calendar 2009;

Notablecalls: I think MOS represents a bounce candidate for today. Note management conf call started today at 11:00 AM ET - suspect they will do their best to soften the hit.

Looking to buy in the $56-$59 range.

UPDATE: Merrill Lynch downgrades the Ferts:

Cheap stocks likely to get cheaper – downgrading fertilizers We continue to believe that low global grain inventories will create a favorable multi-year demand environment for input providers and that it will take several years for significant new capacity to come on line. While the stocks remain inexpensive they appear to be driven more by price and earnings momentum than by valuation. With phosphate prices falling, nitrogen prices peaking and potash prices rising less than expected there is considerable uncertainty surrounding the near-term earnings outlook as underscored by Mosaic’s earnings miss and downward guidance. The near-term fertilizer demand outlook has become more uncertain as the recent decline in corn prices has reduced the margin advantage over less fertilizer intensive soybeans. We are reducing our ratings from Buy to Underperform on Mosaic, Potash Corp., Agrium, Intrepid, CF, and Terra.

NC: I continue to view the space as a bounce play here. MLCO call is more of a sentiment call than based on any data. Takes a special (didn't say retarded!) person to downgrade a stock following a downside move of $160 -> $55.


Pankaj said...

Are you really suggesting we pay attention to the fundamentals and hope for the bounce?

notablecalls said...

Currently I think MOS (and other ferts) will bounce.

I may be terribly wrong ofc

Short-Term trading call.

FeirFactor said...

I picked up some Mosaic at $47 yesterday morning. I sold half this morning at $45.

I think the valuation is really compelling here and, technically, stock is really oversold.

Let's not forget these guys are highly profitable and making a ton of money. Even if ferterlizer prices are coming way down, they'll still make money.

But I do think the bull market in these stocks is over for sure. Just a bounce