Can Mosaic Earnings Fertilize Its Stock Price?

Source: Mosaic.

Fertilizer companies have had a tough time lately, as industry giants like Mosaic have had to deal with changing conditions in the commodities markets that have had a major impact on the prices they get for their products. In recent years, declines in crop prices have made agricultural customers less willing to spend as much on yield-enhancing products than in the past, and that has weighed on Mosaic and its peers even as infighting among some global players has pressured prices. Coming into Tuesday's second-quarter financial report, Mosaic investors are hoping that solid earnings growth could finally get the stock moving back in the right direction again. Let's take a closer look at Mosaic and what to expect in its second-quarter report.

Stats on Mosaic

Source: S&P Capital IQ.

Will Mosaic earnings satisfy investors? Investors haven't been entirely clear on what to expect from Mosaic earnings in recent months, as the company has seen considerable crosswinds from a number of directions. In particular, currency issues have actually helped Mosaic, but losses on derivative positions have pulled earnings downward. The stock has largely gone nowhere, though, falling about 2% since late April.

Mosaic's results from the first quarter provide some background for what the fertilizer company has seen lately. Sales jumped by nearly 8% to $2.14 billion, and net income soared 35%. One-time items that pulled down last year's first-quarter results partially explained the earnings gains, but cost-cutting measures have paid off for Mosaic, and results for the company's phosphates business were relatively strong even though prices for the potash segment were weaker than the company had expected. CEO Jim Prokopanko noted that strategic initiatives from last year are starting to produce better results, and he remains confident that future gains are still in the pipeline.

Mosaic has taken an interesting approach to the fertilizer business. Fundamentally, it has one of the strongest positions in the phosphates market, with low-cost production capacity that gives it a major competitive advantage over its fertilizer rivals. At the same time, Mosaic retains a substantial amount of exposure to the potash market, and as a member of the Canpotex marketing group, the company has shared in both the tough times for potash producers over the past couple of years and the nascent turnaround that could be forming in the space.

At the same time, though, Mosaic knows that keeping investors happy is also a key part of its long-term success strategy. In May, it said that it would boost its dividend by 10%, now paying $0.275 per share each quarter. The move increases Mosaic's dividend to 2.6%, and while that's far less than what some of its peers in the fertilizer industry are paying, the less aggressive payout gives Mosaic more latitude to pursue other uses for its available capital. Indeed, Mosaic also said that it had authorized stock buybacks of up to $1.5 billion, with the intent to use an accelerated repurchase of $500 million by the end of the third quarter of 2015. These moves "underscore confidence in our investments and Mosaic's ability to grow cash flow across business cycles," in Prokopanko's words, and should reassure hard-hit investors that the stock might have suffered most, if not all, of the damage it will from this particular downturn.

In the Mosaic financial report, watch to see if the company answers questions about the trend toward consolidation in the industry. With many fertilizer makers struggling, the potential for strategic buyouts has risen greatly in recent months, and Mosaic's biggest rival is looking to capitalize on an opportunity that could broaden its reach into Europe. As long as Mosaic preserves enough cash both to keep shareholders satisfied and to take advantage of any chances at growth through acquisition, then it should be in a good position to benefit when conditions in the industry improve.

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