On Jul 23, Zacks Investment Research downgraded leading fertilizer company CF Industries Holdings, Inc. (CF) to Zacks Rank #5 (Strong Sell).
CF Industries reported mixed first-quarter 2013 results on May 8. The company’s adjusted earnings (excluding one-time items) of $6.03 per share were below the year-ago earnings of $6.06, but exceeded the Zacks Consensus Estimate of $6.00.
Sales were down 12.5% to $1.34 billion in the quarter from $1.53 billion in the prior-year quarter. It also missed the Zacks Consensus Estimate of $1.45 billion. The decrease reflected lower sales volumes in both the Nitrogen and Phosphate divisions and lower average prices for urea and phosphates. Sales also declined due to the impact of a change in the selling price calculation method used for products sold by Canadian Fertilizers Limited (:CFL).
CF Industries’ sales from Nitrogen segment and Phosphate segment declined year-over-year, resulting in lower gross margins. Lower export sales associated with a seasonally slow international phosphate market and higher phosphate production costs led to lower sales in the phosphate segment.
CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. The company is facing stiff competition from its domestic peers such as Agrium, Koch Nitrogen, Mosiac, Potash Corp. and Simplot.
CF Industries is also susceptible to cyclical and seasonal changes. The prices of its products are highly sensitive to demand and supply. During periods of industry oversupply, the operational results are affected negatively as the price at which the products are sold declines, resulting in reduced profit margins, write-downs in the value of inventory and temporary or permanent curtailments of production.
Volatility in raw material costs and high debt level are also matters of concerns for CF Industries. The company’s existing indebtedness and any additional debt, which it may incur in the future, could have adverse impact on its operations and liquidity.
The Zacks Consensus Estimate for 2013 for CF Industries has gone down 3.7% to $24.69 per share as most estimates were revised lower over the last 60 days. Similarly, the Zacks Consensus Estimate for 2014 has also decreased 3.8% to $23.05 per share.
Other Stocks to Consider
Other companies in the basic material sector with favorable Zacks Rank are The Andersons, Inc. (ANDE), Limoneira Co. (LMNR) and Ferro Corp. (FOE). All of them hold a Zacks Rank #2 (Buy).
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