Alcoa, Mosaic and Potash: Beware the Buzz

BOSTON (TheStreet) -- Commodity-company bellwethers Alcoa(AA Quote) and Mosaic(MOS Quote), which kicked off third-quarter earnings reports, are bolstering investor sentiment. But is the optimism warranted?

Fertilizer purveyor Mosaic witnessed a 92% decline in its fiscal first-quarter profit to $101 million, or 23 cents a share. Revenue fell 66% to $1.5 billion. Yet the shares rose 4% on the news, baffling bearish analysts.

Competitors Agrium(AGU Quote) and Potash(POT Quote) suffer from the same operating weaknesses. Yet all three stocks have enjoyed double-digit rebounds this year.

Mosaic's average potash selling price fell to $276 a ton, a 73% drop from a year earlier and a 20% sequential decline. Its average phosphate selling price decreased to $382 a ton, down 22% from a year earlier and a 29% sequential decline.

The company's margins have narrowed sharply. A bottoming doesn't indicate a resumption of growth or pricing power. Mosaic's gross margin shrank from 40% to 22% during the quarter and its operating margin slimmed from 36% to 9%.

Mosaic's strongest attribute is fiscal prudence. Its cash balance has ascended 19% to $2.6 billion since last year's fiscal first quarter and debt has fallen 7% to $1.4 billion, giving its balance sheet a net cash tilt.

The company's trailing price-to-earnings ratio of 17 is deceptively low because Mosaic earned $2.15 a share in its second quarter. Assuming Mosaic can hit Wall Street's next quarterly earnings target of 63 cents, its stock has an earnings multiple of 36, a hefty premium to the market.