After falling another 25%-plus in Thursday trading, shares of Mosaic ( MOS), an erstwhile highflyer in the agriculture sector, have now fallen more than 70% in less than four months. Agrium ( AGU) ( AGU) and Potash ( POT) have shed more than 50% in that time frame.In terms of sheer market value erosion, Monsanto ( MON) wins the prize, shedding roughly $35 billion in value this summer. Could the ag cycle have gone from scorching bull market to hibernating bear market that fast? Clearly not. Instead, unbridled investor euphoria has been replaced by extreme levels of pessimism. Once the dust settles and investors start to look at how the next three to four years are likely to play out for these stocks, shares should claw back and move toward the midpoint of optimism and pessimism. Let's run through some key numbers in Mosaic's just-released quarterly report to see how business is progressing.
- Per-share earnings of $2.65 trailed forecasts by 29 cents, precisely the amount that earnings were exceeded in the prior quarter. Notably, for the last five quarters, profits had exceeded forecasts by at least 10%.
- In a broader context though, fiscal (May) first-quarter profits represent the third straight quarter of 30%-plus sequential profit growth. Even as analysts take down their $3.40-per-share estimate for the current quarter, profits are still likely to be at least 10% higher -- sequentially -- than in the past quarter.
- First-quarter sales of $4.32 billion exceeded forecasts by 8%. Analysts had extremely robust assumptions for gross margins, which led to the profit shortfall. The phosphate segment (which accounts for 56% of sales) generated gross margins of 38.8%, compared with 29.9% in the year-ago quarter. The potash segment (21% of sales) generated gross margins of 51.5%, compared with 30.7% in the year-ago quarter. "Offshore" sales (23%) generated gross margins of 17.2%, compared with 10.3% in the year-ago quarter. On a blended basis, gross margins rose to 38.1%, from 26.0% a year ago.
- Phosphate has moved into an oversupply situation that has led the company to trim future production and which will likely hurt pricing. Management insists that a phosphate inventory correction is temporary, perhaps as short as one quarter, but investors appear to discount that optimism. If the company can point to lower inventory levels on the next conference call, then investor sentiment is likely to brighten.
- More broadly, it is safe to assume that gross margins generated in the fiscal first quarter represent a cycle peak (although falling energy prices could keep margins near current robust levels).