On Nov 11, we retained our Neutral recommendation on fertilizer company CF Industries (CF). While the company should gain from lower natural gas costs in North America, we remain on the sidelines considering pricing pressure, near-term challenges in its phosphate business and high debt level.
Adjusted earnings for the third quarter of 2013, reported on Nov 4, beat the Zacks Consensus Estimate. However, revenues fell by double-digits on lower fertilizer pricing and competitive pressure and missed expectations. The company saw declines across its nitrogen and phosphate businesses in the quarter.
CF Industries, a Zacks Rank #3 (Hold) stock, should benefit from declining natural gas costs in North America and a solid 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.
Low-cost North American natural gas has been an advantage for CF Industries. The company’s Nitrogen segment is enjoying the benefit of abundant natural gas supply. Moreover, CF Industries is expected to benefit from strong U.S. corn plantations.
In addition, 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, CF Industries’ annual marketable nitrogen volume rose by around 425,000 gross tons of ammonia and 275,000 tons of urea. The company is also progressing with its capacity expansion projects in Louisiana and Iowa.
However, weakness in CF Industries’ phosphate business is expected to sustain through 2013. Lower domestic and overseas demand is hurting phosphate volumes and pricing, as seen in the third quarter.
CF Industries expects phosphate prices to remain constrained through the balance of 2013 due to weak international demand, especially from India. Unfavorable subsidy for phosphate products is hurting Indian phosphate imports. Moreover, oversupply in the market, especially from Chinese export producers, is putting pressure on the urea market and pricing.
CF Industries also 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 companies in the basic materials sector worth considering are Methanex Corporation (MEOH), Asahi Kasei Corporation (AHKSY) and The Scotts Miracle-Gro Co. (SMG). While Methanex and Asahi Kasei hold a Zacks Rank #1 (Strong Buy), Scotts Miracle-Gro retains a Zacks Rank #2 (Buy).