CF Industries to Gain from Healthy Plantations, Expansion

On Nov 11, we issued an updated research report on fertilizer maker CF Industries (CF). While the company should gain from its capacity expansion projects and healthy domestic corn plantations, it remains exposed to pricing pressure and certain near-term headwinds.

CF Industries’ profit for third-quarter 2014, reported on Nov 5, slid year over year on a double-digit decline in sales. The bottom line was hit by higher natural gas costs. Both revenues and earnings missed Zacks Consensus Estimates. However, CF Industries is optimistic about nitrogen demand in 2015.

CF Industries, a Zacks Rank #3 (Hold) stock, should benefit from healthy U.S. corn plantations. More than 90 million acres of corn are expected to be planted next year, thereby driving the demand for nitrogen.

Strong demand for urea is anticipated in North America in 2015 due to significant corn and wheat acres expected to be planted next year, which is expected to result in price appreciation during the spring application season.

CF Industries also remains on track with its capacity expansion projects in Louisiana and Iowa. Both projects are expected to expand the company’s production capacity by 25%. CF Industries plans to spend roughly $1.6 billion on capacity expansion projects this year.

Moreover, CF Industries has a strong cash flow profile, which allows it to return value to shareholders and invest in growth initiatives. The company, in Aug 2014, raised its quarterly dividend by 50% and announced an additional $1 billion share repurchase program.

However, CF Industries continues to see pricing pressure associated with lower pricing for certain nitrogen products. Urea prices have been under pressure due to higher supply from Chinese export producers. Chinese urea exports are expected to be higher in 2014 than what was witnessed last year.

In addition, CF Industries faces intense price competition from both domestic and foreign fertilizer producers. The prices of its products are highly sensitive to demand and supply.

Moreover, the company’s current low ammonia inventory coupled with planned turnaround activity and unplanned outages are expected to affect its total availability for the fall season, thereby restricting ammonia sales volumes in the fourth quarter.

Other Stocks to Consider

Other companies in the basic materials sector worth considering include Minerals Technologies Inc. (MTX), Ferro Corporation (FOE) and Innospec Inc. (IOSP). While Minerals Technologies sports a Zacks Rank #1 (Strong Buy), both Ferro and Innospec hold a Zacks Rank #2 (Buy).