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On Aug 19, we reaffirmed our Neutral recommendation on leading fertilizer company CF Industries (CF - Analyst Report). While the company should benefit from declining natural gas costs in North America, we continue to tread with caution factoring in pricing pressure, near-term challenges in its phosphate business and high debt level.
Why Maintained?
Both revenues and adjusted earnings for second-quarter 2013, reported on Aug 6, beat Zacks Consensus Estimates. However, revenues fell year over year as a double digit decline in CF Industries’ Phosphate segment offset a modest gain in the Nitrogen division. The company sees pricing pressure across its businesses through the balance of the year.
CF Industries, a Zacks Rank #3 (Hold) stock, is benefiting 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.
Falling natural gas prices have 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. 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. 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 in the near term. Lower domestic and overseas demand is hurting phosphate volumes and pricing, as seen in the second quarter. The company expects phosphate prices to remain constrained through the remainder of 2013 due to weak international demand.
CF Industries also 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 Ferro Corp. (FOE - Snapshot Report), KMG Chemicals Inc. (KMG - Snapshot Report) and Sensient Technologies Corporation (SXT - Snapshot Report). While Ferro retains a Zacks Rank #1 (Strong Buy), both KMG Chemicals and Sensient Technologies hold a Zacks Rank #2 (Buy).

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