Last week, Mosaic announced - and missed - its earnings. The miss wasn't by much - $2.65/share versus $2.94/share expected - and the guidance wasn't terrible. But the guidance was realistic, with the company mentioning they'd be scaling back production to better match demand and presumably draw down what have been flush inventories.
So of course the whole sector is worth half what it was a week ago.
What's happened is an old-fashioned price-to-earnings collapse. As the chart below shows, the P/E for Mosaic has fallen from the lofty heights of 40-50 down to the 20s, and now, into the single digits.
Let's stop and think for a minute about what this means. It means that for Mosaic to be fairly priced here, you have to believe the agricultural game has completely changed. That earnings growth (which has been phenomenal) is not only coming to an end, but that earnings may actually be headed for a dramatic decline. In 2006, with quarterly earnings fairly flat, the market felt a fair P/E for the stock was around 20. As earnings rose, so did the P/E, up into the 40s. Last week, the market felt a fair P/E for Mosaic was back in the 20s - a kind of rational retrenchment from the fever pitch of midsummer. This repricing, which we've written about in commodities for a few months now, held basically in line with a declining market while the credit crisis was fever-pitched.
And yet now, despite the passage of the Fed bailout, these fertilizer stocks are somehow worth less than half of last month's value?
Clearly Mosaic CEO Jim Prokopanko must have said something really horrible in the quarterly conference call, right? Let's see what he said (Reuters):
"To say no, there are going to be no implications [on the farm economy from the credit crunch], that would be careless and whistling past the graveyard. But, we see the farm economy as solid, and our reports are that banks are still lending to farmers."
Huh. Well, that sounds fairly straightforward.
