CF Industries Retained at Neutral
We have retained our Neutral recommendation on leading fertilizer company CF Industries (CF) following its mixed first-quarter 2013 results. While the company is expected to benefit from higher grain prices, we remain on the sidelines considering volatility in raw material costs and high debt level.
Why Maintained?
CF Industries’ adjusted earnings for the first quarter, reported on May 8, beat the Zacks Consensus Estimate. However, revenues fell at a double-digit clip on declines across nitrogen and phosphate businesses and missed expectations. CF Industries is optimistic about the second quarter based on higher grain prices.
CF Industries, a Zacks Rank #3 (Hold) stock, is benefiting from high global prices for commodities, 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.
Falling natural gas prices have been a boon for CF Industries. Moreover, the company is expected to benefit from strong U.S. corn plantations. Roughly 97 million acres of corn are expected to be planted in 2013, thereby driving the demand for crop nutrients, in particular, nitrogen.
In addition, the roughly $900 million 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 increased by about 425,000 gross tons of ammonia and 275,000 tons of urea.
However, CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. It is also susceptible to cyclical and seasonal changes. Moreover, 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 with favorable Zacks Rank are American Vanguard Corp. (AVD), OM Group Inc. (OMG) and Ferro Corp. (FOE). While both American Vanguard and OM Group retain a Zacks Rank #1 (Strong Buy), Ferro carries a Zacks Rank #2 (Buy).
Read the Full Research Report on CF
Read the Full Research Report on FOE
Read the Full Research Report on AVD
Read the Full Research Report on OMG
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