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Reaffirming CF Industries at Neutral

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We are retaining our Neutral recommendation on CF Industries Holdings Inc. (CF - Free Report) . Third-quarter 2012 revenues and earnings beat the Zacks Consensus Estimates. Lower nitrogen volumes and a decline in phosphate product prices led to a roughly 3% year-over-year decline in sales in the quarter. Sales volume dipped due to lower urea sales.
Revenues from the core Nitrogen segment remained flat, while sales from the Phosphate division fell 8% in the quarter. Gross margin in the Nitrogen segment jumped 16%, helped by lower natural gas costs. However, margins shrank 26% in the Phosphate unit due to lower average selling prices.
CF Industries remains positive for the remainder of 2012 as well as 2013 based on high corn planting expectations for 2013, strong domestic fertilizer demand, tight domestic nitrogen supply and favorable natural gas costs.
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 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. Cost of natural gas fell roughly 25% in the third quarter.
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.
However, CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. Its domestic competitors such as Agrium Inc. and Potash Corp. of Saskatchewan Inc. holds significant command in the marketplace.
CF Industries is susceptible 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.
CF Industries currently retains a Zacks #2 Rank, which translates into a short-term Buy rating.

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