Mosaic's (NYSE:MOS) stock was holding up strong until May when a disappointing announcement from the company put a wrench in its growth. The stock has shed 7% over the past three months, making it one of the worst-performing fertilizer stocks for the period. Whether the stock will continue its downfall or recoup its losses will, to a great extent, now depend on what Mosaic has in store for investors when it reports its fourth-quarter numbers next week.
While numbers will matter, recent developments will likely take center stage in Mosaic's upcoming report, and that's where your attention should be. A lot of interesting things are brewing within the company, which could play an important role in determining its future. Mosaic's outlook will also be critical, given the timing of its earnings release. Here's what to expect next week.
More money in your pocket?
Among the important information investors should look out for in Mosaic's upcoming earnings call are the company's capital allocation plans, especially after the recent disappointing news from Cargill.
Mosaic was spun off from privately held Cargill in 2011, but the latter still holds a 30% stake in the company which it plans to offload after November. To prevent dilution of its shares and the risk of a takeover bid, Mosaic wanted to repurchase shares directly from Cargill before November. Unfortunately, Cargill disagreed, leaving Mosaic with no option but to wait.
More importantly, this development means that Mosaic's ability to buy back common shares also remains restricted till November. So the likelihood of a share repurchase this year, which the market was banking on, looks dim. Watch closely for an update in Mosaic's upcoming earnings call. Any hint of a possible buyback this year could boost Mosaic's share price, especially since peer PotashCorp (NYSE:POT) has already made clear its intentions of announcing a buyback program before the year ends.
Tough times could be in store
It will also be important to see whether Mosaic follows PotashCorp's footsteps on another count – idling plants for maintenance during the summer months for an extended period of time. PotashCorp plans to shut one of its mines for an additional six weeks this year, which probably looks like a move to tackle the inventory glut. Lower demand from key global markets like India and China last year resulted in a huge imbalance between demand and supply for potash fertilizer, forcing the key potash players – PotashCorp, Mosaic, and Agrium (NYSE:AGU) – to idle several plants.
While the last contract these companies signed with India, through legal cartel Canpotex, continues through January 2014, the one with China ended in June. With the main selling season in the U.S. already over and the two international buyers yet to sign fresh contracts, the next few months could be tough for Mosaic.
The big advantage that could turn bigger
Mosaic recently postponed plans to expand annual potash capacity by 2 million tons because of high costs. Soon after, Agrium decided to defer two of its nitrogen expansion projects. While Agrium's decision was largely influenced by the volatility in the prices of natural gas – a key input for nitrogen fertilizer – Mosaic is less affected by natural gas because it doesn't sell nitrogen.
That should help Mosaic grow its gross margin in the future even as nitrogen-centric companies like CF Industries (NYSE:CF) and Rentech Nitrogen Partners (NYSE:RNF) battle rising input costs. While CF's stock has lost nearly 17% in the past six months because of the recent uptick in natural gas prices, Rentech's shares plummeted 37% over the period for the same reasons. Both companies are relying on forward booking of gas prices to reduce risk.
Yet, how efficiently Mosaic can boost its margins will also depend on whether the company can curtail costs in hard times. As I mentioned earlier, international markets look weak. So Mosaic's management might want to find ways to streamline operations to reduce cost pressures. Look for any signs in the company's upcoming earnings call.
The Foolish bottom line
Mosaic is likely to end the year on a good note since its earnings for the nine months ending Feb. 28 improved year over year. The company is also expected to provide an outlook for the next financial year, which should give you an idea about what to expect from Mosaic over the next year or so, particularly on the share buyback front.
Fool contributor Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.