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Bear of the Day: Mosaic (MOS)

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The Mosaic Company (MOS - Free Report) continues to grapple with the extreme weather which hit US farmers in both the spring and the fall this year. This Zacks Rank #5 (Strong Sell) is seeing further cuts to its 2019 and 2020 earnings estimates.

Mosaic makes concentrated phosphate and potash crop nutrients. It is a single source provider of phosphate and potash fertilizers and feed ingredients for the global agriculture industry.

A Miss in the Third Quarter

On Nov 5, Mosaic reported its third quarter results and missed on the Zacks Consensus Estimate by $0.19. Earnings were just $0.08 versus the consensus of $0.27.

That's a miss of 70.4%.

It was the second consecutive miss in a row.

It saw strong performance in Potash and Mosaic Fertilizantes, but the Phosphates segment is still struggling and gross margins declined there.

It has been lowering production in both phosphates and potash to match demand.

Mosaic temporarily idled the Colonsay, a potash mine in Saskatchewan in August. In the fourth quarter, the Esterhazy, a second Saskatchewan potash mine, will be temporarily idled. Those idlings will curtail 600,000 tonnes in 2019.

On Oct 1, Mosaic also announced it would reduce phosphates production by 500,000 tonnes by temporarily idlings operations in Louisiana.

All three facilities are available to resume production when demand improves.

What About Demand?

The slowdown in demand has lasted far longer than anyone in the industry originally believed. While the record rainfall hurt in the spring planting season, a rare fall polar vortex bringing snow and below freezing temperatures is expected to hit the heartland during the fall application period.

It's too soon to know the impact on the farmers.

“While the challenging market environment has persisted longer than we had anticipated, the actions we are taking give us an improved platform to deliver value and shareholder returns,” said Mosaic President and CEO Joc O’Rourke.

“We are seeing volumes move in North America and believe that strong volumes will lead to improved pricing. We believe that the bottom of the market is in and that 2020 will be a much stronger year for Mosaic and the customers we serve," he added.

Estimates for 2019 and 2020 Fall Again

Mosaic cut full year guidance and the analysts adjusted their 2019 estimates accordingly.

The 2019 Zacks Consensus has fallen to $1.06 from $1.49 in the last 3 months. That's a 50% decline in earnings as Mosaic made $2.12 in 2018.

One estimate was also cut in the last week for 2020 pushing the 2020 Consensus Estimate down to $1.68 from $1.70 the week before the earnings.

That's a return to earnings growth of 58%.

Are Shares a Bargain?

Shares of Mosaic have fallen 28.9% year-to-date but over the last 3 months they're down just 8.7%.

However, they still trade with a forward P/E of 19.5, which isn't cheap from a standard classic valuation perspective.

Mosaic is buying its own shares at these levels however. Year-to-date it has purchased $150 million in stock, with $125 million of that in the third quarter.

It has a $250 million authorization.

Mosaic also pays a dividend, currently yielding 1%.

The earnings picture isn't much better in its fertilizer peers. Nutrien NTR is also a Zacks Rank #5 (Strong Sell).

Investors interested in the fertilizer industry may want to wait until 2020 for a clearer picture on demand.

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