On Nov 25, 2014, Zacks Investment Research downgraded fertilizer maker The Mosaic Company (MOS) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Mosaic reported its third-quarter 2014 results on Oct 30, 2014. The company’s adjusted earnings per share were 56 cents, which missed the Zacks Consensus Estimate by 3 cents. Revenues rose roughly 18% year over year to $2,250.7 million on double-digit sales gains across phosphate and potash businesses, but lagged expectations.
The Zacks Consensus Estimate for Mosaic for 2014 decreased 5.6% to $2.37 per share, following 5 downward estimate revisions over the last 30 days. The Zacks Consensus Estimate for 2015 also went down around 2.4% to $3.22 per share over the same period. Mosaic has also delivered negative earnings surprises in the last four quarters with an average negative surprise of 8.2%.
Mosaic is currently facing a challenging business environment in agriculture and there is a continuous negative sentiment among agriculture investors that can create uncertainty in 2015. Also, agricultural commodity prices are weak.
Mosaic is also facing pricing pressure in the phosphate segment. Phosphate prices remain depressed even as costs rose for raw materials. The company has thus decided to reduce phosphate production in response to these conditions.
Moreover, the company also lowered its forecast for global phosphate shipments for both 2014 and 2015 by roughly a million tons partly due to India importing more phosphoric acid for NPK fertilizer production.
Mosaic also foresees a bumper harvest in the next season which will possibly bring prospects of lower income for growers in 2015, making them skeptic in their business.
Mosaic is also exposed to macroeconomic uncertainties and other issues such as volatility in prices for key raw materials including ammonia and sulfur, and currency exchange fluctuations (mainly Canadian dollar and Brazilian real). Unfavorable swings in costs of key inputs – ammonia and sulfur – may hurt the company’s cost structure and profitability.
Other Stocks to Consider
Better-ranked companies in the basic materials sector worth considering include Innospec Inc. (IOSP), Valhi, Inc. (VHI) and Celanese Corporation (CE). While Innospec and Valhi sport a Zacks Rank #1 (Strong Buy), Celanese carries a Zacks Rank #2 (Buy).
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