February 18, 2014 - Mosaic Will Help Your Portfolio Grow
Earnings reports are a good way to measure how a company is doing, and to compare its performance to the expectations of analysts who spend a lot of their time trying to figure out how the company is performing.
Of course, we all know that most reports don’t come in exactly in line with estimates. In most cases, beating estimates is seen as a positive, while missing estimates is seen as a negative. This is a pretty simplistic way to look at things, and sometimes it is hard to tell if a company missed estimates due to poor performance, or because the analysts guessed wrong.
I always kind of enjoy it any time a company misses earnings estimates and the stock rises anyway. It is always nice to be reassured that there are still plenty of investors who pay attention to things besides the often meaningless and sometimes counter-productive bottom line numbers that seems to dominate a lot of media coverage.
On recent example of this is Mosiac (MOS). The company may not be widely known, but it is one of a handful of companies that compete in the extremely important potash and phosphate-fertilizer industry.
Before the market opened on Feb. 11, Mosiac reported earnings of 30 cents per share on revenue of $2.2 billion for the fourth quarter, while analysts had expected 42 cents per share on $1.86 billion in revenue. Even adding in the 6 cents-worth of non-recurring items that the company said had a negative effect on earnings in the quarter, the company’s earnings were still short of the mean estimate by about 14 percent.
Despite the earnings miss, the stock gained 2.4% that day. Part of that optimism was likely due to the company’s better-than-expected revenues. Part of it is likely due to the company’s announcement of a $1 billion share repurchase plan, which adds to a $2 billion repurchase announced in December.
There are some other, more complicated reasons to be bullish on the company though. For one, the disruption in the global potash market that was caused when a Belarusian potash trading firm dissolved last year seems to be over and prices are starting to stabilize. The company expects prices for both commodities to rise next year, and also expects to global shipments of potash to be a record 64 to 66 million tons in 2014.
In addition, Mosiac and several other potash firms are close to reaching a deal sell potash to India, the world’s leading phosphate importer. Reuters reported that Mike Rahm, Mosiac’s vice president of market analysis and strategic planning, expects an increase in demand in India to raise the global price for phosphate.
Mosiac’s CEO, Jim Prokopanko, pointed out that there is some pent-up demand in North America that could have a positive effect on prices as well. In a Reuters interview, Prokopanko said frozen rivers and overcrowded railroads have made shipping commodities difficult, leaving buyers “desperate.”
With so many things seemingly working in the company's favor, and a strong commitment to repurchasing shares, the stock seems likely to be headed higher. Traders may be interested in a March 42.50/45 bull-put credit spread. This position yields a 30-cent credit, which is a 13.6 percent return, or 138 percent on an annualized basis (for comparison purposes only). This position will return a full profit as long as the stock closes above $45 at March expiration, which means this trade has 5.5 percent downside protection.
Chart courtesy of stockcharts.com