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The Mosaic Company: A guide and comprehensive analysis

Part 3
The Mosaic Company: A guide and comprehensive analysis (Part 3 of 9)

Why lower sales have led to Mosaic’s shares falling 20.8%

Shares fell 20.8%

Over the past year, Mosaic’s share price has fallen 20.8% (as of January 23, 2014). A few days ago, a Goldman Sachs analyst downgraded Mosaic from hold to sell, stating that the market is overly optimistic on the price of potash.

Why lower sales have led to Mosaic's shares falling 20.8%Enlarge Graph

Lower sales

Decreasing sales have been the main reason for Mosaic’s and its peers’ share price decline. Phosphate and potash are products with low price elasticity. This means demand doesn’t meaningfully fluctuate when price changes. In more intuitive terms, farmers won’t buy more potash when the price goes down—just like they won’t buy less when the price increases. As a result, price and sales are almost proportionally correlated.

Mosaic’s revenue is divided among phosphate (65%) and potash (35%) sales, with earnings of 32% and 68%, respectively. In fiscal year 2013, revenues decreased 11.36%, to $9,974.1 million, and quarterly reports in 2013 are showing declining sales as well. The main reason for this fall is that the average selling price of potash and phosphate has been declining, while demand has either stayed the same or decreased.

What happened to potash, and what can we expect?

Even though potash represents the smaller portion of sales, it generates 62% of profits due to its high profitability—making it the more important product for Mosaic. Since 2011, potash prices have been dropping due to an increase in supply and weak demand. Expectations for potash prices are conflicting among experts. Some analysts expect potash to slowly increase in price (see Why potash stocks could be a winner for investors in 2014). But others, like the Goldman Sachs analyst who downgraded Mosaic, believe in a more negative picture.

Phosphate PriceEnlarge Graph

What about phosphate?

The principal phosphate products are diammonium phosphate (or DAP) and monoammonium phosphate (or MAP). Similar to potash, average phosphate selling prices have been falling. In Mosaic’s case, the average DAP selling price was $512 per tonne in fiscal 2013—a decrease of $43 per tonne or 8% compared to fiscal 2012. However, decreasing raw material costs such as sulfur, ammonia, and phosphate rock partially offset the decrease in the phosphate products prices.

Mosaic’s share price strongly depends on the development of these commodities. Because they’re the two main drivers of MOS’s share price, it’s worthwhile keeping ourselves updated on these prices. For the fiscal year that ended on December 31, 2013, analysts expect (though reports have yet to be published) revenue to decrease to $8,713.33 million, a year-over-year decline of 21.57%. Investors shouldn’t forget that these expectations are already reflected in the share price, and some analysts expect sales to be even lower.

The main point to take from this article is that the changes in phosphate and potash prices directly affect Mosaic’s sales, its earnings, and subsequently its stock performance.

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