Citi Moves CF Industries To Neutral, Says Near-Term Outperformance 'May Be Difficult'

CF Industries Holdings, Inc. CF shares have jumped 42 percent over the past year, prompting a downgrade by Citi on valuation.

The Analyst

Citi analyst P.J. Juvekar downgrades shares of CF Industries from Buy to Neutral and lowered the price target from $47 to $45.

The Thesis

CF Industries shares are factoring in urea prices of $300 per ton in 2019 as opposed the $270 per ton Citi is modeling that assumes more "mid-cycle" type multiples, Juvekar said in a Tuesday note. (See the analyst's track record here.) 

Flat urea prices would be a negative for investors, who are bracing for better near-term conditions, as higher U.S. urea prices are needed to attract imports ahead of planting, the analyst said. 

Some of the factors that drove Citi's upgrade of urea prices from $160 per ton last summer to $250 per ton may dissipate, leading to lower prices, Juvekar said. 

"Tactically, given the run in CF shares we think it may be difficult for near-term outperformance to continue in a falling urea price environment." 

Citi assumes a 30-percent sequential decline in urea prices into the third quarter. In the long run, Citi projects favorable trends due to urea supply growth from 2018-2021 that appears to fall consistently beneath long-term demand growth.

Although marking its first-quarter earnings per share estimates to market, Citi said its 2018-2022 earnings per share estimates are "mostly unchanged."

Citi's bull-case scenario sees upside to $55 with strengthening urea prices, while its bear case has shares dropping to $35 in the event of weakening urea prices. 

In the agricultural space, the firm said it likes FMC Corp FMC and Nutrien Ltd. NTR.

The Price Action

CF Industries shares were down 3.51 percent Tuesday afternoon. 

Related Links:

CF Industries Shares Have 50% Upside, Says Bernstein Analyst

3 Market Winners From A Bipartisan Farm Bill In 2018