Are Mosaic Co. Shares About to Get Pummeled Next Week?

PotashCorp (NYSE: POT  ) underscored the dire situation that fertilizer markets are in when it missed Street estimates on its fourth-quarter earnings by a gaping margin and slashed guidance for 2014. And when the world's largest fertilizer maker sounds cautious, it's a warning bell for investors in any fertilizer company.

That's exactly why Mosaic (NYSE: MOS  ) investors may brace for a disappointing week ahead as the company prepares to announce its fourth-quarter and full-year numbers Tuesday. Or will Mosaic prove critics wrong and spring a surprise, given its relatively lower exposure to potash nutrient and recent restructuring moves?

Mosaic's margin could plummet
Mosaic didn't provide projections for the fourth quarter during its last earnings call, partly because it recently changed its financial year period for reporting purposes. But it's not tough to guess what's coming, given the present condition of the fertilizer markets.

Mosaic expects to end the fourth quarter with potash sales volumes and prices ranging between 1.5-1.9 million tonnes and $285-$310 per tonne, respectively. Sequentially, that would mean higher volumes at lower prices.

While volumes may have improved on strong North American fall planting and Latin American planting seasons, potash prices have plummeted nearly 25% since the fallout between potash giants Uralkali and Belaruskali in the middle of last year. PotashCorp displayed a similar trend during its fourth quarter, reporting 13% higher potash volumes at an average price of only $282 per tonne.

What's worrisome is that lower prices could hit Mosaic's margins significantly. Mosaic may have greater exposure to phosphate, but its profitability largely depends on potash. For perspective, phosphate nutrient accounted for 75% of Mosaic's total third-quarter sales, but contributed only 40% to its operating profit. Clearly, investors shouldn't be surprised if Mosaic reports a sharp slump in gross margin for its fourth quarter.

Will Mosaic pare down more assets?
With not much happening on the operational front, the focus will be on Mosaic's plans to keep up with the challenging times. Mosaic announced some major changes to its business portfolio during the third quarter, and investors should watch for further updates in its upcoming earnings call.

Moves included closing down a potash mine, exiting distribution businesses in Argentina and Chile, dropping plans for a new ammonia plant, and most importantly, striking a deal with CF Industries (NYSE: CF  ) to acquire its phosphates business for $1.2 billion.

Those initiatives should result in considerable cost savings, which could help boost Mosaic's margin in these challenging times. In the upcoming call, investors should also note whether Mosaic has plans to downsize operations further.

Money on your way?
With uncertainty shrouding the fertilizer industry, it's unlikely that Mosaic will spend much on investments over the next few years, except on a potash expansion program that's already under way and phosphate expansion in Saudi Arabia.

Expansion under way at a Mosaic potash plant. Image source: Company website.

On a positive note, lower capital expenditure should boost free cash flow, especially if earnings continue to grow, or even remain stable. For investors, that could mean greater rewards in the form of dividends and share buybacks. Investors will know what to expect next week.

So Mosaic's upcoming earnings report should not only give investors an idea about where the company is headed, but also whether it can stand out in the fertilizer market, thanks to its efforts to realign operations and reduce costs. Mosaic also doesn't have to worry about rising natural gas prices, unlike PotashCorp and CF Industries, both of which produce nitrogen that uses natural gas as key input.

The Foolish bottom line
With recent potash market developments looking positive, and Mosaic securing leadership position in the phosphate market through its deal with CF Industries, investors may hope for decent guidance from the company next week. And that should be enough to propel the shares higher. In any case, Mosaic stock's been pummeled heavily over the past one year, so downside risk looks limited. Stay tuned to know more about Mosaic's future plans and growth potential. 

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