CF Industries Holdings, Inc. CF is an attractive play in the fertilizer space. The fertilizer maker is gaining from higher nitrogen demand driven by healthy corn plantations and cyclical recovery in the nitrogen fertilizer industry.
CF Industries is also benefiting from higher prices of nitrogen fertilizers, which is helping it to generate strong margins and cash flows. Low natural gas prices in North America have also been an advantage for CF Industries.
The trend in earnings estimate revisions also indicates a solid earnings outlook for CF Industries.
CF Industries currently has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. Our research shows that stocks with a VGM Score of A or B combined with a Zacks Rank #1 or #2 (Buy), offer the best investment opportunities for investors.
Let's delve deeper into the factors that make CF Industries stock a compelling investment option at the moment.
Growth prospects for CF Industries look impressive. The Zacks Consensus Estimate for earnings for 2018 for CF Industries is currently pegged at $1.62, reflecting an expected year-over-year growth of a whopping 748%. Moreover, earnings are expected to register a 62.4% growth in 2019. The company also has an expected long-term earnings per share growth rate of 6%.
Earnings estimates for 2018 have also moved up over the past three months. Over this period, the Zacks Consensus Estimate for 2018 has increased by around 13.3%. The same for 2019 have moved up 45.3% over the same period.
Revenues for CF Industries for 2018 is projected to rise roughly 10.8% year over year as the Zacks Consensus Estimate for the year is currently pegged at $4.58 billion. Revenues for 2019 are also expected to increase 8.5% year over year as the Zacks Consensus Estimate is $4.97 billion.
CF Industries has outperformed the industry over the past two years. The company’s shares have rallied around 48.7% over this period, compared with a 16.1% growth recorded by the industry.
Favorable Industry Fundamentals
CF Industries, in its third-quarter call, said that it expects the global market fundamentals, which drove higher global nitrogen prices during the third quarter, to continue through the fourth quarter and into first-half 2019.
Moreover, outlook for global nitrogen demand is positive for the first half of 2019, the company noted. In the United States, farmers are expected to plant 93 million acres of corn in 2019, around four million more acres than 2018 levels. CF Industries expects this along with the expected increase in wheat plantings to drive stronger nitrogen demand in North America.
CF Industries also envisions strong demand in Brazil in 2019. It sees higher urea imports to Brazil next year due to the closure of two Petrobras urea plants.
Per CF Industries, China's role in globally traded urea continued to shrink in the third quarter. Export volumes from China was limited due to enforcement of environmental regulations along with higher feedstock costs. Expected demand for urea in Brazil and India is forecast to support a tighter global nitrogen demand and supply balance into 2019.
CF Industries is benefiting from higher nitrogen prices. Higher production costs across Europe and Asia coupled with reduced production due to the environmental restrictions in China tightened global nitrogen supply and demand balance and boosted nitrogen prices this year. Higher nitrogen prices and strong execution have helped the company to achieve strong margins this year.
Cost Advantaged Position
CF Industries is also enjoying the benefits of low North American natural gas prices, driven by an increase in production of shale gas in the United States. This is providing the company production cost advantage. Rising energy costs outside of North America are increasing this cost advantage.
Lower natural gas costs helped the company to record solid operational performance and boost its earnings in third-quarter 2018. CF Industries expects cost of natural gas to remain low in North America vis-à-vis the rest of the world. This should provide margin benefits in the fourth quarter and into 2019.
CF Industries is also generating robust free cash flows and remains focused on returning value to its shareholders through dividends and share buybacks. The company generated free cash flow of more than $500 million in the third quarter and more than $900 million during the first nine months of 2018. Higher nitrogen prices, solid operational performance and low production costs (driven by cheap natural gas prices) are allowing the company to generate strong cash flows.
CF Industries paid $210 million in dividends during the first nine months of 2018. The company also repurchased 3 million shares through Oct 31, 2018 worth $150 million and had $350 million remaining under the current share repurchase authorization.
CF Industries Holdings, Inc. Price and Consensus
CF Industries Holdings, Inc. Price and Consensus | CF Industries Holdings, Inc. Quote
Other Stocks to Consider
Other top-ranked stocks worth considering in the basic materials space include The Mosaic Company MOS, Cameco Corporation CCJ and RPM International Inc. RPM.
Mosaic has an expected earnings growth rate of 75.2% for the current year and carries a Zacks Rank #2. The company’s shares have rallied 26% over the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cameco has an expected earnings growth rate of 66.7% for the current year and carries a Zacks Rank #2. The company’s shares have gained 15% in the past year.
RPM International has an expected earnings growth rate of 18.4% for the current fiscal year and carries a Zacks Rank #2. The company’s shares have gained 15% in the past year.
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