Mosaic (MOS) Q1: Will Weak Fertilizer Prices Hurt Earnings?

Mosaic (NYSE:MOS) is set to release its first-quarter 2016 results before the bell on May 4.

In the last quarter, the fertilizer maker delivered a 20.45% positive earnings surprise. However, its profits tumbled in the quarter, hit by lower phosphate and potash prices. Lower prices and sluggish demand hurt margins in the company’s core phosphates business. Reduced volumes and pricing also contributed to a decline in revenues in the quarter.

Let's see how things are shaping up for this announcement.

Factors to Consider

Mosaic’s guidance (issued in February) indicated a year-over-year fall in sales volumes for phosphate and potash in first-quarter 2016. Mosaic expects phosphates sales volumes in the band of 1.8–2.2 million tons for the first quarter versus 2.3 million tons for the same quarter in 2015. The segment’s gross margin for the quarter is expected to be roughly 10%, while operating rate is estimated to be around 70%-80% reflecting the company’s move to curtail production.

Potash sales volumes have been forecast in the range of 1.5 to 1.9 million tons for the quarter versus 2 million tons a year ago. The segment’s gross margin is expected to be in the low to mid 20% range in the first quarter.

Mosaic sees a record year for global phosphate shipments in 2016. For potash, it expects a more stable operating environment this year.

Mosaic is curtailing production in its phosphates business by up to 400,000 tons, with rotating plant shutdowns during first-quarter 2016. The move is in response to the current crop nutrient market conditions. The company said that buyers are deferring purchases due to the recent volatility in prices and the fall in costs of raw materials that in turn is prolonging the seasonal period of sluggish demand.

Mosaic is exposed to a difficult business environment in agriculture and there is a continuous negative sentiment among agriculture investors. Continued downturn in crop prices is weighing on U.S. farm income. Lower farm income unfavorably impacts grower’s input purchasing decisions.

Mosaic also faces a still challenging pricing environment. Agricultural commodity prices in general remain weak.

The company is seeing lower pricing for nutrients as witnessed in the last reported quarter. Its guidance for the first quarter also indicated depressed pricing for potash and phosphate. Potash prices remain under pressure due to increased supply. This may weigh on the company’s March quarter results.

The general outlook for the fertilizer space still remains cloudy due to insipid economic growth in certain developing markets such as Brazil. Tighter profit margins and credit are making growers in Brazil more cautious in their spending.

Earnings Whispers

Our proven model does not conclusively show that Mosaic is likely to beat earnings estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: The Earnings ESP for Mosaic is -21.43%. This is because the Most Accurate Estimate is 11 cents, while the Zacks Consensus Estimate is pegged at 14 cents.

Zacks Rank: Mosaic has a Zacks Rank #5 (Strong Sell). We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Scotts Miracle-Gro Company (NYSE:SMG) has an Earnings ESP of +1.12% and a Zacks Rank #2.

Orion Engineered Carbons SA (NYSE:OEC) has an Earnings ESP of +13.79% and a Zacks Rank #3.

Albemarle Corporation (NYSE:ALB) has an Earnings ESP of +1.18% and a Zacks Rank #3.

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