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On Feb 28, we upgraded our recommendation on leading fertilizer company CF Industries (CF - Analyst Report) to Outperform based on its strong fourth-quarter 2012 earnings and favorable outlook. Strength in the ammonia market, favorable natural gas costs and excellent execution helped the company to rake in record earnings in the quarter.

Why the Upgrade?

CF Industries’ adjusted earnings of $7.27 per share, reported on Feb 19, trumped the Zacks Consensus Estimate of $7.03. On a reported basis, the company earned a record $7.40 a share in the quarter, up 11.1% from $6.66 a year ago. Revenues, however, fell roughly 14% in the quarter due to a change in selling price calculation methodology and missed expectations.

CF Industries is positive regarding first-half 2013 based on high corn planting expectations, strong domestic fertilizer demand and favorable natural gas costs.

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 have been a boon 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. Lower natural gas costs led to higher gross margin in the Nitrogen division in the fourth quarter.

CF Industries continues to invest in lucrative projects. The company, in Aug 2012, entered into a deal with Glencore International to buy a 34% interest in the Medicine Hat nitrogen facility owned by Viterra Inc (a wholly-owned subsidiary of Glencore). The deal replaced an earlier agreement under which Glencore planned to sell the stake to Agrium Inc (AGU - Analyst Report). The acquisition will boost CF Industries’ nitrogen production capacity.

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.

Other Stocks to Consider

Other fertilizer companies having favorable Zacks Rank are Rentech Nitrogen Partners, L.P. (RNF - Snapshot Report) and Monsanto (MON - Analyst Report). Both hold a Zacks Rank #2 (Buy).

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