We are downgrading our long-term recommendation on CF Industries Holdings Inc. (CF) to Neutral from Outperform based on the cautious outlook of the company about the demand levels for phosphate in the first half of 2012, rising raw material costs and unfavorable weather conditions affecting the yield of the products.
CF is exposed to cyclical and seasonal changes. During the fourth quarter of 2011, fertilizer markets experienced softness in seasonal demand, along with the global uncertainties leading to steep declines in the prices of grains and nutrients.
Natural gas is the key input in the production of nitrogen fertilizer products like urea, ammonia, ammonium nitrate, etc. It formed about 45% of the cost of producing ammonia in 2011. The market price for natural gas in North America is highest in the world creating further pressure on the margins of the company.
CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. Its domestic competitors, such as Agrium Inc.(AGU), Potash Corp. of Saskatchewan Inc. (POT) Koch Industries Inc., Mosiac and Simplot, have significant command in the marketplace.
China, being the world’s largest producer and consumer of fertilizers, influences global fertilizer prices. Russia and Ukraine have a greater leverage on the global urea price as they are the world’s largest producer and consumer of fertilizers.
In February 2012, CF industries released its fourth-quarter 2011 results. The company reported fourth-quarter EPS of $6.66 per share, missing the Zacks Consensus estimate by a penny. For fiscal 2011, net earnings came in at $21.98 per share versus $5.34 per share in fiscal 2010.
Total sales of $1.72 billion in the reported quarter increased 38.8% from $1.24 billion in the prior-year quarter. In fiscal 2011, total sales were $6.1 billion, compared with $4 billion in 2010. The company’s Nitrogen segment achieved record sales of $5 billion in the year, reflecting an increase of 57% from the previous year.
CF’s outlook for North American crop nutrient market remains positive. Strong demand and tight inventories are expected to support crop prices and continuing high levels of plantings, particularly corn in 2012.
This tight inventory balance is expected to support high corn prices for the next several years, providing farmers with a compelling incentive to plant corn. The company projects U.S. farmers will plant 93.5 million acres of corn in 2012, an increase of 1.6 million acres from 2011.
Management projects higher capital expenditures of approximately $400 million in 2012 compared with 2011 due to an increased pace of planned maintenance and support expansion plans at existing facilities, announced in August 2011. Front-end engineering and design studies for expansion projects are in the process and should lead to investment decisions in the second half of 2012.
CF Industries is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products in the world. Currently, the company has a Zacks #3 Rank on its shares, which translates into a short-term (1 to 3 months) “Hold” rating and we maintain a “Neutral” recommendation on the shares for the long- term (more than 6 months).
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