CF Industries Holdings, Inc.
/ (CF-NYSE)We downgrade our recommendation on CF Industries to Neutral. Strength in the ammonia market, favorable natural gas costs and excellent execution helped the company to rake in record earnings in fourth-quarter 2012. Adjusted earnings outperformed the Zacks Consensus Estimate. However, revenues fell at a double-digit clip on weakness in the nitrogen segment and missed expectations. 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. Strong domestic fertilizer demand and lower natural gas costs are expected to drive its results in first-half 2013. However, CF Industries faces intense pricing competition. It is also exposed to volatility in raw material costs and has significant debt.
/ Equity Research / CF | Page 7
Current Recommendation / NEUTRAL
Prior Recommendation / Outperform
Date of Last Change / 03/21/2013
Current Price (03/20/13) / $196.50
Target Price / $206.00
SUMMARY
/ Equity Research / CF | Page 7SUMMARY DATA
52-Week High / $230.4952-Week Low / $154.25
One-Year Return (%) / 7.61
Beta / 1.23
Average Daily Volume (sh) / 1,477,901
Shares Outstanding (mil) / 64
Market Capitalization ($mil) / $12,576
Short Interest Ratio (days) / 2.33
Institutional Ownership (%) / 93
Insider Ownership (%) / 0
Annual Cash Dividend / $1.60
Dividend Yield (%) / 0.81
5-Yr. Historical Growth Rates
Sales (%) / 18.4
Earnings Per Share (%) / 23.9
Dividend (%) / 41.9
P/E using TTM EPS / 7.0
P/E using 2013 Estimate / 7.7
P/E using 2014 Estimate / 8.2
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Fertilizers
Zacks Industry Rank * / 108 out of 267
OVERVIEW
CF Industries Holdings Incorporated (CF), headquartered in Deerfield, Illinois, is one of the largest manufacturers and distributors of nitrogenous and phosphatic fertilizer products in the world. The company’s principal products in the nitrogenous fertilizer business are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Its main products in the phosphatic fertilizer business are diammonium phosphate (DAP) and monoammonium phosphate (MAP).
CF Industries is a leading nitrogen fertilizer producer in North America. Approximately 83% of its total sales in the year 2012 came from the nitrogen business and the remaining 17% from the phosphate fertilizer business. In the nitrogen business, CF Industries operates two of the largest fertilizer complexes in North America, one in Donaldsonville, Louisiana, U.S. and the other in Medicine Hat, Alberta, Canada.
CF Industries is a major manufacturer of phosphate fertilizer products. Its phosphate fertilizer manufacturing operations are located in central Florida and consist of a phosphate fertilizer chemical complex in Plant City, a phosphate rock mine, a beneficiation plant and phosphate rock reserves in Hardee County and a deepwater terminal facility in the port of Tampa.
The Terra Acquisition
In April 2010, CF Industries finally acquired the long chased after rival Terra Industries for $4.7 billion. With the acquisition, the company has become the global leader in the nitrogen fertilizer industry and has expanded geographically. In the Terra acquisition, CFHoldings issued an aggregate of 9.5million shares of its common stock and paid an aggregate of $3.7billion in cash. The acquisition added the following new assets:
· Five nitrogen fertilizer manufacturing facilities located in Port Neal, Iowa; Courtright, Ontario; Yazoo City, Mississippi; Woodward, Oklahoma; and Donaldsonville, Louisiana, adjacent to the CF Industries Donaldsonville facility.
· A 75.3% interest in Terra Nitrogen Company,a publicly traded limited partnership, which through its subsidiary Terra Nitrogen Limited Partnership operates a nitrogen fertilizer manufacturing facility in Verdigris, Oklahoma.
· A 66% economic interest in the largest nitrogen fertilizer complex in Canada (which it operates in Medicine Hat, Alberta through Canadian Fertilizers Limited (CFL), a consolidated variable interest entity);
· A 50% interest in Point Lisas Nitrogen Limited, or Point Lisas, an ammonia production joint venture located in Trinidad serving international nitrogen markets.
· A 50% interest in GrowHow UK Limited, a nitrogen products production joint venture in the UK. The joint venture serves the British agricultural and industrial markets.
· 50% interest in KEYTRADE AG (Keytrade), a global fertilizer trading company headquartered near Zurich, Switzerland.
REASONS TO BUY
Ø Since the Terra acquisition in April 2010, the company has become the global producer of nitrogen fertilizers. The Nitrogen segment achieved sales of roughly $5.1 billion in 2012, up 2% year-over-year, driven by the Terra acquisition. The company, in 2011, expanded its Woodward, Oklahoma nitrogen facility, where it added an additional 200,000 tons of ammonia a year to obtain higher value UAN. Moreover, the company’s move to buy Viterra Inc's 34% interest in the Medicine Hat nitrogen facility further underscores its strategy to invest in lucrative projects. CF Industries has earmarked an additional $1 billion to $1.5 billion for other capital projects within its existing nitrogen complexes in North America, further increasing its growth potential. It plans to spend roughly $2 billion between 2013 and 2016 on capacity expansion and product upgrade projects, which are expected to offer roughly 1 million additional gross tons of ammonia and 3.5 million tons of combined UAN and urea capacity.
Ø CF Industries entered into a definitive agreement, in early 2011, to sell four dry product warehouses and related assets to GROWMARK Inc. and one of its subsidiaries. Over the past few years, the company’s throughput utilization of these facilities declined significantly as an increasing portion of its dry product volume was shipped directly to customers from manufacturing locations. CF Industries' distribution facilities will continue to focus on its strong positions in storage and timely delivery of ammonia and UAN. In addition, the company’s dry products warehouse in the Minneapolis/St. Paul area will continue to play an important role in seasonal delivery of dry fertilizers.
Ø The company enjoys abundant cash flows, which can help it improve its balance sheet, distribute cash to shareholders and invest in the growth of the business. During 2011, CF Industries retired the last of its acquisition-related term loans. In 2012, the company completed the 2011 share repurchase program ahead of schedule and bought back 3.1 million shares for $500 million. The company’s Board has approved a new program to buyback shares worth up to $3 billion through December 31, 2016.
Ø Falling natural gas prices has been an advantage for CF Industries. The company’s Nitrogen segment is enjoying the benefit of abundant natural gas supply, driven by an increase in production of North American shale gas and favorable weather. Lower natural gas costs led to higher gross margin in the Nitrogen division in the most recent 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.
REASONS TO SELL
Ø CF Industries faces intense pricing competition from both domestic and foreign fertilizer producers. Its domestic competitors, such as Agrium, Koch Nitrogen, Mosiac, Potash Corp. and Simplot, have significant command in the marketplace. China, being the world’s largest producer and consumer of fertilizers, influences global fertilizer prices. Being one of the largest producers and exporters of urea, Russia and Ukraine have a greater leverage on the global urea price.
Ø The company is exposed to cyclical changes. The prices of the products get affected by the demand and supply. Periods of high demand, high capacity utilization and increasing operating margins tend to result in investment in production capacity, which may cause supply to exceed demand and selling prices and capacity utilization to decline. During periods of industry oversupply, the results of operations are affected negatively as the price at which the products are sold declines, resulting in reduced profit margins, write-downs in the value of inventory and temporary or permanent curtailments of production. Weather conditions also have either adverse or favorable effect on the crop yields.
Ø CF Industries continues to operate with high debt level with total debt of roughly $1.6 billion as of December 31, 2012. The company’s existing indebtedness and any additional debt which it may incur in the future could have adverse impact on its operations and liquidity.
RECENT NEWS
Record Earnings for CF Industries – February 19, 2013
CF Industries’ fourth-quarter 2012 adjusted earnings (excluding one-time items) of $7.27 per share exceeded the Zacks Consensus Estimate of $7.03.
After including one-time items, the company earned a record $7.40 a share in the quarter, up 11.1% from $6.66 in the year-ago quarter. Strong ammonia market, favorable natural gas costs and excellent execution helped the company to achieve record earnings for the quarter.
For full-year 2012, earnings excluding one-time gains and charges were $27.92, also exceeding the Zacks Consensus Estimate of $27.87 per share. After including one-time items, earnings came in at a record $28.59 per share in the year.
Sales were down 13.8% to $1.48 billion in the quarter from $1.72 billion in the prior-year quarter. It also missed the Zacks Consensus Estimate of $1.58 billion. The decrease reflected the impact of a retroactive modification to the selling price calculation methodology used for products sold by Canadian Fertilizers Limited (CFL), which was made in connection with CF Industries’ pending acquisition of the outstanding interests in CFL.
For the full year, sales inched up 0.1% year over year to $6.1 billion but missed the Zacks Consensus Estimate of $6.2 billion.
Costs and Margins
Cost of sales stood at $825.2 million in the reported quarter compared with $853.2 million in the year-earlier quarter. Gross profit decreased 24.2% year over year to $656.2 million in the quarter. Selling, general and administrative expenses jumped 9.2% to $40.2 million from $36.8 million in the year-ago quarter. The company reported an operating income of $616.1 million, up 25.7% from $829.1 million in the prior-year quarter.
Segmental Performance
Nitrogen Segment
Sales declined 16% year over year at $1.2 billion in the fourth quarter. Gross margin plunged 21.1% to $620 million. Total sales volumes were up 3% year over year to 905,000 tons of ammonia in the quarter due to strong fall applications across the U.S. Corn Belt. Cost of sales declined in the quarter due to lower realized natural gas costs. Realized natural gas price in the quarter declined to $3.61 per MMBtu from $4.06 a year ago.
Phosphate Segment
Sales almost remained flat year over year at $255.8 million. Gross margin declined 54% to $36.2 million due to lower prices and higher phosphate production costs. Volumes sold in the quarter were 509,000 tons compared with 439,000 tons a year ago, attributed to higher domestic sales to support strong fall application. The average selling prices of diammonium phosphate (DAP) and monoammonium phosphate (MAP) were $499 and $527, respectively, down 13.4% and 12.7% year over year.
Financial Position
Cash and cash equivalents totaled $2.27 billion as of Dec 31, 2012, compared with $1.21 billion as of December 31, 2011. Long-term debt stood at $1.60 billion as of Dec 31, 2012, compared with $1.61 billion as of Dec 31, 2011.
Outlook
CF Industries remains positive regarding the first half of 2013 based on high corn planting expectations, strong domestic fertilizer demand and favorable natural gas costs. The company expects capital expenditures for its announced capacity expansion projects at Donaldsonville, La., and Port Neal, Iowa, to be in the range of $1-$1.3 billion in 2013. Capital expenditures for the company’s existing facilities are anticipated to be about $450 million.
CF Industries Beats on All Fronts – November 5, 2012
CF Industries’ third-quarter 2012 adjusted earnings (excluding one-time gains) of $5.85 per share exceeded the Zacks Consensus Estimate of $5.82. After including one-time items, the company earned $6.35 a share in the quarter, up 34.2% from $4.73 in the year-ago quarter.
Sales were down 3.2% to $1.36 billion in the quarter from $1.40 billion in the prior-year quarter. However, it edged past the Zacks Consensus Estimate of $1.35 billion. Lower nitrogen volume and phosphate product pricing led to the decline in sales. Total sales volumes decreased 2% year over year to 3.5 million tons due to lower urea sales.
Costs and Margins
Cost of sales stood at $657.4 million compared with $765.8 million in the year-earlier quarter. Gross profit increased 10% to $702 million in the quarter. Selling, general and administrative expenses jumped 19.7% to $36.5 million from $30.5 million in the year-ago quarter. The company reported an operating income of $667.1 million, up 14.6% from $582.3 million in the prior-year quarter.
Segmental Performance
Nitrogen Segment
Sales were flat year over year at $1.1 billion. Gross margin spiked 16% to $638.6 million. Total sales volumes were down 3% year over year to 3 million tons in the quarter. Cost of sales declined in the quarter due to lower realized natural gas costs. Natural gas production was high during the quarter and amount of natural gas in storage was also high. The realized natural gas price in the quarter declined to $3.34 per MMBtu from $4.45 a year ago.
Phosphate Segment
Sales declined 8% year over year to $264.2 million. Gross margin declined 26% to $63.4 million due to lower prices. Volumes sold in the quarter were 517,000 tons, up from 505,000 tons a year ago, attributed to higher domestic sales as customers sought to rebuild inventory in anticipation of strong demand from high expected corn plantings next year. The average selling prices of diammonium phosphate (DAP) and monoammonium phosphate (MAP) were $507 and $521, respectively, down 10.4% and 8.1% year over year.
Financial Position
Cash and cash equivalents totaled $2.22 billion as of September 30, 2012, compared with $1.21 billion as of December 31, 2011. Long-term debt stood at $1.60 billion as of September 30, 2012, compared with $1.61 billion as of December 31, 2011.