Neutral on CF Industries

We are retaining our Neutral recommendation on CF Industries Holdings Inc. (CF - Analyst Report). First-quarter 2012 revenues and earnings topped the Zacks Consensus Estimates. Healthy growth in sales was driven by strong nitrogen demand during the North American spring planting season.

Revenues from the core Nitrogen segment jumped 37% in the quarter buoyed by an abundant supply of natural gas. Gross margin shot up 50% riding on higher sales volumes, better pricing and lower realized natural gas costs. However, the company saw lower margins in the Phosphate segment in the quarter on account of lower average selling prices and higher raw material costs.

CF Industries has high expectations for the spring planting season. According to the U.S. Department of Agriculture, farmers intend to plant 95.9 million acres of corn, 55.9 million acres of wheat and 13.2 million acres of cotton this year. At current crop prices, CF Industries forecasts farmers to have the opportunity to realize strong profits, with the economics remaining attractive for corn planting.

Deerfield, Illinois-based CF Industries is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products globally. The company became the global producer of nitrogen fertilizers following its $4.7 billion buyout of Terra Industries in April 2010.

CF Industries is benefiting from high global prices for commodities, 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 has been an advantage for CF Industries. The company’s Nitrogen segment is reaping the benefit of abundant natural gas supply, driven by increased production of North American shale gas and favorable weather. Moreover, CF Industries is expected to benefit from strong U.S. corn plantations, which may reach record levels this year, as reflected in the company’s guidance.

However, CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. Its domestic competitors, such as Agrium Inc. (AGU - Analyst Report), Potash Corp. of Saskatchewan Inc. (POT - Analyst Report), Koch Industries Inc. and Mosiac hold significant command in the marketplace.

CF Industries is exposed to cyclical and seasonal changes. The prices of its products are highly sensitive to demand and supply. It is also exposed to volatility in raw material costs and has significant debt. Moreover, the company may witness a decline in ammonia volumes in the second quarter, thereby impacting sales volume. All these factors lead us to tread with caution.

CF Industries currently retains a Zacks #2 Rank, which translates into a short-term “Buy” rating.