With investors on edge, companies cannot afford to disappoint. Take a look at fertilizer-maker Mosaic (NYSE:MOS). Last week, the company reported a 77% spike in earnings to $1.17 per share. However, the Street consensus was for $1.29. As a result, MOS shares plunged by nearly 10% to $48.97.
Mosaic’s return for 2011 is a horrible -35.67%. This certainly is in stark contrast to 2009 and 2010, when MOS shares returned 76.97% and 28.18%, respectively.
So might Mosaic’s huge drop-off have created a buying opportunity? To see, let’s take a look at the company’s pros and cons:
- Global platform. Mosaic is one of the world’s biggest fertilizer companies. It ranks No. 1 for the production of phosphates and No. 3 for potash. The barriers to entry in these markets are enormous because of the limited number of deposits as well as the difficulties of dealing with foreign governments.
- Secular trends. With growing populations and the continued difficulties with finding arable land, there should be steady growth for fertilizers. Also, a big driver will be from emerging economies such China and India. Keep in mind that as wealth increases, demand increases for premium foods.
- Valuation. For the most part, Mosaic’s shares look cheap. The company’s price-to-earnings ratio is only about 9. Actually, Mosaic could be a buyout target as well. With Cargill selling off its shares in the company, it could make things easier for a transaction.
- Costs. These were a big problem in the prior quarter. For example, there was a 15% increase in costs for phosphate production, which primarily was the result of the inflation in raw materials like ammonia and sulfur.
- Competition. While the market is highly consolidated on a global basis, Mosaic still faces pressure from big-time rivals. The main ones include Potash (NYSE:POT), BHP Billiton (NYSE:BHP) and Agrium (NYSE:AGU). Thus, it can be tough to increase prices to deal with the general rise in input costs.
- Economy. In the short term, Mosaic might feel the pressure from a slowing global economy. But perhaps the most troubling development is economic deceleration in China, which has been a big growth driver.
Even with a low valuation, Mosaic faces some big headwinds as the company’s costs should remain a problem and demand is likely to trail off. Interestingly enough, according to a recent report from the USDA, corn stockpiles have surged. Thus, if there is a hit to farmers’ income, it could mean fewer purchases from Mosaic.
So while the long-term prospects still look bright for the company, there could be more trouble ahead for investors. In other words, the cons outweigh the pros on the stock for now.