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Alcoa, Mosaic and Potash: Beware the Buzz

Investors are bullish on commodities companies' earnings reports, though a look beneath the surface shows extreme weakness.
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) -- Commodity-company bellwethers


(AA) - Get Alcoa Corporation Report



(MOS) - Get Mosaic Company Report

, 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.





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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.

Alcoa tells a different story. But the devil's in the details.

The Dow component, the first among the 30 index members to report third-quarter earnings, was expected to post a third-quarter loss, but managed a profit of $77 million, or 8 cents a share. Revenue grew 9% sequentially to $4.6 billion. But it sank 34% from a year earlier. Still, Chief Executive Officer Klaus Kleinfeld said yesterday that demand is improving, though he added that Alcoa is battling higher energy costs and unfavorable exchange rates.

Alcoa's cost of goods sold tanked 31% to $3.9 billion. General and administrative, restructuring, and research and development expenses were noticeably lower as was capital expenditures. Alcoa has laid off 19,000 workers in a year. Faster-than-forecast corporate streamlining was the catalyst for improved earnings.

In addition, Alcoa booked a $123 million gain in what it called "other expenses (income), net," without which the company would have posted an operating loss. On a conference call, Kleinfeld attributed $58 million of the gain to a Suralco transaction benefit.

Another point of weakness: Alcoa has curtailed 20% of its smelting capacity and has no intention of ramping up production in the fourth quarter. Although the company's profit surprised analysts -- most expected a loss -- its operating results confirm the prevalent trend: excessive cost cutting, weak revenue and cash hoarding.

However, unlike Mosaic, its product's price has rebounded. Aluminum now fetches $1,972 per metric ton, an 18% sequential improvement. Alcoa's stock was up 6% in after-hours trading. Investors and analysts have been speculating for months that at some point "less bad" would no longer cut it.

But judging by investors' reaction to the results, "less bad" is still reason enough to buy for some. rates Mosaic and Alcoa "hold."

-- Reported by Jake Lynch in Boston.