On Aug 13, we issued an updated research report on CF Industries ( CF). While the fertilizer maker should benefit from its capacity expansion projects and healthy domestic corn plantations, pricing pressure and high debt level remain concerns.
CF Industries’ profit for second-quarter 2014, reported on Aug 6, slid year over year on a double-digit decline in sales, hurt by lower fertilizer pricing. Earnings missed the Zacks Consensus Estimate while sales beat. CF Industries expects to benefit from a number of factors supporting its growth and potential to generate sustainable cash flows.
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. It is expected to gain from healthy U.S. corn plantations. More than 90 million acres of corn are expected to be planted next year, thereby driving the demand for nitrogen.
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 $1.7 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.
Moreover, CF Industries has a strong cash flow profile, which allows it to return value to shareholders and invest in growth initiatives. The company recently announced a 50% hike in its quarterly dividend and an additional $1 billion share repurchase program.
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 second quarter. Urea prices have been under pressure due to higher supply from Chinese export producers. The opening of China’s low-tariff export season (leading to higher export) has 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.
CF Industries also continues to operate with high debt level with total debt of roughly $4.6 billion at the end of the second quarter, up 48% year over year.
Other Stocks to Consider
Other companies in the basic materials sector worth considering include Chemical & Mining Co. of Chile Inc. ( SQM), Yara International ASA ( YARIY) and Celanese Corporation ( CE) with all holding a Zacks Rank #2 (Buy).