CF Industries: Risk-Reward Balanced - Analyst Blog

On May 14, we issued an updated research report on CF Industries CF. While the fertilizer maker should gain from favorable natural gas costs and capacity expansion projects, pricing pressure and high debt level remain concerns.

  

CF Industries' adjusted earnings for the first quarter of 2014, reported on May 7, topped the Zacks Consensus Estimate. Reported profit surged on a hefty gain from the sale of the company's phosphate business to Mosaic MOS. However, revenues fell on lower fertilizer pricing and missed expectations. 

 

CF Industries, a Zacks Rank #3 (Hold) stock, should benefit from low-cost North American natural gas and a healthy start to the domestic planting season. Moreover, the company has a strong cash flow profile, which allows it to return value to shareholders and invest in growth initiatives.

 

CF Industries remains on track with its capacity expansion projects in Louisiana and Iowa. Both projects are expected to expand the company's production capacity by 25%. CF Industries plans to spend roughly $2 billion on capacity expansion projects this year.

 

Moreover, the acquisition of Viterra Inc.'s 34% interest in the Medicine Hat nitrogen facility underscores CF Industries' strategy to invest in lucrative projects. Following the acquisition, the company's annual marketable nitrogen volume rose by roughly 270,000 net tons of ammonia and 275,000 tons of urea. 

 

However, CF Industries continues to see lower nitrogen sales. Lower prices for major nitrogen products are hurting sales and margins in this business as witnessed in the first quarter. Urea prices have been under pressure due to higher supply from Chinese export producers. CF Industries expects the opening of China's low-tariff export season in Jul 2014 (leading to higher export) to put additional pressure on global urea prices.

 

In addition, CF Industries faces intense price competition from both domestic and foreign fertilizer producers. The prices of its products are highly sensitive to demand and supply. CF Industries is also exposed to volatility in raw material costs and has significant debt.

 

Other Stocks to Consider

 

Other fertilizer stocks worth considering include CVR Partners, LP UAN and Yara International ASA (YARIY) with both holding a Zacks Rank #1 (Strong Buy).