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Bull of the Day: CF Industries (CF)

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CF Industries Holdings, Inc. (CF - Free Report) is riding the wave of tight supply and higher urea prices. This Zacks Rank #1 (Strong Buy) is expected to see explosive earnings growth this year and next.

CF Industries is one of the largest nitrogen fertilizer manufacturers and distributors in the world with a market cap of $11 billion.

Riding Rising Prices

Much like the energy companies, CF Industries fortunes depend on commodity prices, in this case, the cost of the fertilizers and natural gas.

For the last several years, prices have been depressed in the fertilizer industry which meant declining earnings for everyone. But companies have hung on and weathered the storm.

Now, prices are rising.

Urea has jumped to 2-year highs in the last 6 month. By October, Urea prices were up 30% year-over-year and were clearly breaking out.

The higher demand, lower supply dynamic is expected to persist into 2019 and possibly beyond which is setting up the fertilizer companies to be cash generating machines.

Big Beat in the Second Quarter

On Aug 1, CF Industries reported its second quarter results and blew by the Zacks Consensus Estimate by 21 cents. Earnings were $0.63 versus the consensus of just $0.42.

The company shipped a record 5.5 million product tons in the quarter.

The company saw lower North American gas costs and higher nitrogen prices which drove a 33% increase in adjusted EBITDA in the first half compared to 2017.

Net sales rose to $1.3 billion from $1.1 billion in the second quarter of 2017. Average selling prices for the second quarter were higher year-over-year in all segments

In the first six months the average selling prices compared to 2017 were the following:

Ammonia: $333 per ton v. $324 per ton
Urea: $258 v. $228
UAN: $178 v. $173

Demand is expected to remain strong globally heading into the back half of 2018.

CF Industries reports third quarter results on Oct 31, 2018 so there will be more information on the outlook for 2019.

Estimates Move Higher

Analysts have been raising estimates in the last month as the urea price continues to rise, trading over $275 per ton in recent weeks.

One estimate was revised higher in the last month for 2018 and one for 2019.

The 2018 Zacks Consensus Estimate has jumped to $1.43 from $1.00 over the past 3 months. That's an earnings increase of 672% as the company lost $0.25 a share in 2017.

For 2019, the Zacks Consensus Estimate has risen to $2.12 from $1.69 over the last 90 days. That's earnings growth of 48.7%.

Shares Pull Back- A Buying Opportunity?

Given the hot fertilizer prices, it's not surprising that shares had taken off this year. But the recent stock market sell off has spooked some investors, so CF Industries shares have fallen 18% from recent highs.

They're still up 9% on the year, however.

The stock isn't cheap, with a forward P/E of 34, but you're paying for the growth story with this one.

CF Industries is generating so much cash now it announced a $500 million share repurchase program good through 2020. It also pays a dividend, yielding 2.5%.

For investors looking to get back into the fertilizer stocks, this recent pullback just before the earnings report could be a buying opportunity.

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