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Earnings Scorecard- CF Industries
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ShareFertilizer company, CF Industries Holdings Inc’s (CF) second quarter 2010 results fell short of analysts’ expectation. Results missed the Zacks Consensus Estimate by a significant 65 cents. However, CF’s shares rallied on Terra Industries acquisition that concluded in the beginning of the last month.
Terra Acquisition
After a year-long battle, CF Industries has finally acquired its Iowa-based rival Terra Industries, and now owns more than 90% of Terra. CF had been wooing Terra since January 2009. The transaction is an all-stock deal for a total amount of $4.7 billion. Terra specializes in nitrogen production in the Midwest and Canada. The combined entity is a global leader in nitrogen fertilizer manufacturing, with a total capacity of 6.3 million nutrient tons of nitrogen and 2.1 million nutrient tons of phosphate.
Furthermore, the transaction would generate $105 million–$135 million in annual cost synergies from lower selling, general & administrative costs by optimizing transportation and distribution systems, and through greater economies of scale in procurement and purchasing. CF expects to realize the cost synergies within two years of integration.
The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short term and the long term have been covered in full length below.
Earnings Report Review
CF Industries Holdings Inc.’s 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 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 top line 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 fell 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.
(Read our full coverage on this earnings report: CF Falls Far Short of Estimates - Zacks.com )
Agreement of Estimate Revisions
Following the second quarter earnings release, analysts maintained a negative outlook on CF. Concerns over lower nitrogen selling prices and declining phosphate volumes overshadowed the long-term benefits of the Terra acquisition.
We see the majority of downward revisions during the last 7 days. Of the 10 analysts covering the stock, 4 provided negative revisions to their earnings estimate for the third quarter and fourth quarter of 2010. For the full year 2010, 3 of the 6 analysts covering the stock pulled the estimate down further.
Over the last month, 1 analyst upped while two analysts downgraded their forecasts for the next quarter and full year 2010. Concerns over lower nitrogen selling prices and declining phosphate volumes overshadowed the long-term benefits from the Terra acquisition.
Magnitude of Estimate Revisions
The estimates fell 16 cents to $1.09 for the upcoming quarter and were down 9 cents for the full year 2010, over the last 30 days. However, earnings estimates rose 15 cents to $1.24 for the third quarter of 2010 while the estimates were up 66 cents for the full year 2010, over the last 1 week.
Our Recommendation
CF Industries has a leading market share in many key fertilizers. It is prepared for a reasonably good application season, spring demand due to attractive corn farming economics, and the needed restocking by downstream fertilizer channels. The acquisition of rival Terra Industries made CF a global leader in the nitrogen fertilizer industry, which has seen strong consolidation trends. The company is set to achieve significant cost synergies with the integration of the Terra business, which should boost profitability.
However, CF Industries is susceptible to higher natural gas costs and faces intense competition. Lower nitrogen selling prices and lower phosphate volumes primarily affected earnings in the second quarter of 2010. Results missed the Zacks Consensus Estimate by a significant 65 cents.
Currently, CF Industries has a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6+ months) Neutral recommendation.
Read the full analyst report on CF
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