CF Falls Far Short of Estimates

Fertilizer company CF Industries Holdings Inc.,s (CF) net earnings more than halved to $105.1 million or $1.54 per share in the second quarter of 2010 compared with $213 million or $4.33 per share in the year-ago period. The recent acquisition of Terra Industries ("TRA") weighed on the earnings of CF. Excluding a one-time charge related to the acquisition, the company earned $2.51 per share, significantly down from the Zacks Consensus Estimate of $3.16.

CF’s topline jumped 32% year over year to $1.3 billion (including Terra’s net sales of $526.3 million). CF Industries recorded revenues of $780.7 million on a stand-alone basis falling short of the Zacks Consensus Estimate of $1.2 billion. Lower average nitrogen selling prices and phosphate volumes offset the benefits of higher average phosphate selling prices and nitrogen volumes.

Segment in Details

Nitrogen Segment: The Terra acquisition boosted CF’s revenues by 49% to $1.1 billion (including $526.3 million from Terra). CF’s Nitrogen capacity doubled post the acquisition. The company sold 3.9 million tons of nitrogen significantly higher than 1.9 million tons in the year-ago period. CF produces nitrogen products including ammonia, urea, Urea Ammonium Nitrate (UAN) and Ammonium Nitrate (AN) under the segment. Strong demand led to a nearly two-fold increase in ammonia and UAN volumes to 1.2 million and 1.6 million, respectively. However, average selling prices for ammonia were down 45% to $380 per ton while that of UAN declined 30% to $220 per ton. For urea, sales volumes were up 19% to 851,000 tons with prices almost stable at $292 per ton. Lower selling prices, however, restricted the growth in profits. Gross profit of $367.5 million was down 9% year over year. Margins came in at a lower rate of 33% versus 53% in the previous year.


Phosphate Segment: Revenues in the quarter slipped 22% to $185.1 million on a 32% decline in total sales volumes, primarily driven by lower exports (down 33%). Lower volumes offset the pricing gain in the quarter. Phosphate product prices remained strong. For diammonium phosphate, average selling price shot up 32% to $400 per ton while prices climbed 20% for monoammonium phosphate to $414 per ton. Gross profit of $29.3 million was higher than $23.8 million in the second quarter of 2009 leading to margins of 15.8% compared with 10.1% in the year-earlier period.

The Terra Acquisition

In April, CF Industries finally concluded the long pursued Terra Industries Inc acquisition, which made CF the world's second-largest nitrogen products manufacturer and the third-largest phosphate producer among the publicly traded companies. CF expects annual synergies from the acquisition to exceed the targeted range of $105 million to $135 million.
 
Financial Review

CF Industries recorded cash and cash equivalent and short-term investments of $601.4 million against total debt of $2.6 billion. The Terra acquisition was partially funded by the cash on hand and a $3.75 billion in new debt. To pay off such loans, CF made a public issue of shares and generated $2.7 billion. The company targets net debt in the range of 1.0 to 1.5 times of EBITDA.

Outlook

CF Industries foresees a positive market for nitrogen and phosphate fertilizers due to an early harvest. Lower inventories and an expected high demand in Asia, especially Latin America and India should drive nitrogen business in the near-term. CF expects the phosphate market to improve in the second half of 2010.

Zacks Recommendation

CF Industries has a leading market share in many key fertilizers. The company is prepared for a reasonably good application season and spring demand due to attractive corn farming economics. The acquisition of rival Terra Industries made CF a global leader in the nitrogen fertilizer industry, which has seen strong consolidation trends. However, CF Industries is susceptible to higher natural gas costs and faces intense competition from other industry players like, Potash Corporation of Saskatchewan Incorporated (POT).

The Zacks Consensus Estimate for the next quarter and full year 2010 is $1.20 and $7.97 per share, with an upside potential of 31.67% and 6.9%. CF Industries’ shares advanced $2.91 and closed at $85.80 per share in regular trade while it fell $2.30 in after-hours trading to $83.50 per share.

Currently, CF a has short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6 months and higher) Neutral recommendation.