It's Easy As A, B, CF

CF Industries CF reported blow out earnings last night, crushing estimates and announced a plan to quadruple its annual dividend, and the stock is reacting in kind this morning. The Deerfield, IL-based company reported earnings of $6.75 per share on $1.8 billion in revenues. Wall Street had been expecting earnings of $5.92 per share on $1.77 billion in revenues. “CF Industries performed extremely well during the second quarter as our team adapted to the delayed, but ultimately protracted, spring application season,” said Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc. “Our employees made full use of our expanded production and distribution system to respond to dynamic market conditions, overcome severe logistical challenges and deliver on our customer commitments. As a result, we achieved the highest sales, net earnings and earnings per share for any quarter in the company's history.” Cash flow from operations also was a second quarter record. The company said going forward, its yearly dividend will be $1.60 per share, up from 40 cents a share. The next quarterly payment comes on August 29, to shareholders of record on August 15. MO Financial covered the earnings call this morning and the company is extremely bullish on the outlook for its business, which was echoed by Potash Corp. POT last month. The company said gross margins doubled in the past year, which allowed cash flow from operations to jump to $251 million in the current quarter, and the company was able to cut its debt to $661 million, down from $2.011 billion in the year ago period. On the call, CF said it expects corn supplies to continue to remain tight, thanks in large part to the near 7 billion people on Earth, and the ongoing food shortage around the globe. As natural gas prices have remained low and continue to do so, the company has benefited. Natural gas is used as feedstock for ammonia, which is used for fertilizer production. At a forward price to earnings ratio of just 9 times 2012 earnings, and with an increased dividend and new buyback, CF Industries continues to provide value for its shareholders over the long run. Even with the market sharply reversing gains from earlier this morning, CF Industries has been able to generate solid returns. Shares are up ~70% over the past year, blowing past the results of the S&P 500, which is around 20%. Seems like putting money into CF is as easy as A, B, C. ACTION ITEMS:

Bullish:
Traders who believe that agriculture will continue to be constrained might want to consider the following trades:

• Consider adding to any of the fertilizer stocks. Global population trends are higher, not lower, and food supplies will continue to be constrained. CF Industries, Potash, Mosaic MOS Itrepid Potash IPI and others all should benefit from this trend.

Bearish:
Traders who believe that the fertilizer sector can not continue to be this robust may consider alternate positions:

• Short these names. If the global economy slows faster than expected, we should see earnings estimates come down on these names.

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