On Oct 11, 2014, Zacks Investment Research downgraded fertilizer company The Mosaic Company (MOS) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Mosaic’s second-quarter 2014 results saw its profits tumble by around 42% year over year following a significant decline in pricing for potash in the quarter. Adjusted earnings missed the Zacks Consensus Estimate.
Revenues declined around 7% year over year, resulting from lower sales volumes. While revenues in the Phosphate segment went up around 6% year over year, revenues fell around 22% year over year in the Potash division, thereby unfavorably impacting total revenues.
The Zacks Consensus Estimate for earnings for Mosaic for 2014 decreased 6.6% to $2.54 per share following eight downward estimate revisions over the last two months. Similarly, the Zacks Consensus Estimate for the current quarter decreased 8.8% to 62 cents per share, following six downward estimate revisions over the same time frame.
Moreover, Mosaic has delivered negative earnings surprises in all the last four quarters, with an average negative surprise of 9.20%. In fact, the company’s third-quarter 2014 earnings ESP (Expected Surprise Prediction) is -4.84%. While Mosaic should benefit from its $1.4 billion buyout of CF Industries Holdings, Inc’s (CF) phosphate business, it is exposed to a weak pricing environment. Average selling price for potash fell roughly 27% year over year in the second quarter, dragging down revenues and profits in the process. Pricing pressure was also witnessed in the phosphate segment. These challenges may persist in the near term.
Fertilizer makers face challenges following the exit of world's largest potash maker, Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (“BPC”). Potash prices have declined sharply since the Uralkali cartel exit move.
While Mosaic expects higher potash imports in India in 2014, depressed potash subsidy levels and local currency devaluation may lead to somewhat subdued demand for the nutrient in that country. A material recovery in potash demand in India is not expected in the near term.
Other Stocks to Consider
Better-ranked stocks worth considering in the fertilizer industry include Intrepid Potash, Inc. (IPI) and The Scotts Miracle-Gro Company (SMG). Both carry a Zacks Rank #2 (Buy).
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