CF Industries Hit With Double Downgrade On Nitrogen Pricing, Long-Term Demand Concerns

Fundamentals at CF Industries Holdings, Inc. CF have improved significantly, but the fertilizer company could suffer a setback, according to Bank of America Merrill Lynch. 

The Analyst

BofA's Steve Byrne downgraded shares of CF Industries from Buy to Underperform and lowered the price target from $48 to $40.

The Thesis

Meaningful risks surround nitrogen prices in the second half of 2018 that could test the market's view of the slope of the recovery, Byrne said in a Thursday note. (See the analyst's track record here.) 

BofA projects that spot NOLA urea prices will drop from $258/st to $200/st over the next six months due to recovering Chinese production rates; the U.S. returning to a net export position in the summer fill season; tapering seasonal demand in the northern hemisphere; and lower international energy prices.

Longer-term, China's increased focus on fertilizer formulations could cause nitrogen fertilizer demand to decline on a multiyear basis, Byrne said.

Although maintaining a positive multiyear constructive view on the nitrogen industry, BofA said the timeframe for CF Industries generating about $5-plus per share in free cash flow is now pushed out beyond 2020. 

"Our new 2018-2019 EBITDA estimates are 5-10 percent below consensus ($2.5-$3 in FCF/shr) and our new $40 PO (was $48) is based on 10x (was 11.5x) our 2018E EV/EBITDA." 

The Price Action

CF Industries shares were up about 39 percent over the past year until Wednesday.

The stock was down 2.43 percent at $40.89 at the close Thursday.

Related Links:

Will Ag Stocks Flourish Now That California's 5-Year Drought Is Officially Over?

A Soy Story: Citi Upgrades Grain Processors Archer Daniels, Bunge