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.
Tom Taulli is the author of “All About Short Selling” and “All About Commodities.” You can also find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.