Corn Sweetens CF's Fertilizer Outlook

4/9/2012


  Recent Price
$188
  Dividend
$1.60
  Yield
0.8%
  P/E Ratio
8
  Shares (millions)
66
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$195.48 - $115.34

CF Industries ($188; CF), the largest producer of nitrogen fertilizer in North America, derives about 85% of its revenue in the U.S., with 8% from Canada and 7% from exports.

Fertilizer demand peaks during the spring planting season. Near-term trends hinge on weather patterns, global economic conditions, and planted acreage — especially for corn, a fertilizer-intensive crop. In recent months, droughts in South America have shrunk harvests and strained global supplies. Meanwhile, mild weather in the U.S. let farmers, motivated by high crop prices, begin their planting season early and devote more land to crops.

At the end of March, the U.S. Department of Agriculture forecast that U.S. farmers will plant 95.9 million acres of corn in 2012, the largest crop in 75 years. A combination of dry weather and soaring soybean prices suggests the USDA projection may be overly optimistic. But even if soybeans eat into corn acreage, constrained supply and strong demand should keep fertilizer prices high in 2012.

CF has positioned itself to capitalize on the higher prices, entering 2012 with advanced customer orders down about 40% from a year earlier. Anticipating that fertilizer prices would climb, CF intentionally kept advanced orders low so sales would more closely reflect spot prices. CF Industries is a Focus List Buy and a Long-Term Buy.

Business breakdown

Sales of phosphate (18% of 2011 revenue) jumped 40% last year, as prices advanced 36%. Nitrogen fertilizer (82% of 2011 sales), more profitable than phosphate, grew revenue 57% on a 38% price increase.

Operating cash flow surged 74% to $2.08 billion last year while free cash flow nearly doubled to a record $1.76 billion, allowing CF to quadruple its quarterly dividend, beef up its balance sheet, and slash outstanding shares by 8%. Operating profit margins expanded 17 percentage points to 41% in 2011, helped by higher production and lower costs for natural gas.

CF's average cost for natural gas fell 4% to $4.28 per million British thermal units (MMBtu) in 2011, a meaningful decline considering that natural gas accounted for 45% of CF's total cost of sales for nitrogen fertilizer last year. By hedging just two-thirds of its projected natural-gas needs for 2012, CF maintained flexibility to scoop up more cheap natural gas, currently trading slightly above $2 per MMBtu.

Conclusion

CF envisions near-record demand for nitrogen this year, though production volumes will likely decline from all-time highs set last year. Management expects more downtime at its facilities — especially in the March quarter — than in 2011, a historically light year for maintenance.

For full-year 2012, Wall Street expects roughly flat per-share profits on a 5% decline in revenue. Shares trade at eight times trailing earnings, 61% below the peer-group median and 28% below CF's three-year average P/E of 11.

An annual report for CF Industries Holdings can be obtained at 4 Parkway North, Suite 400, Deerfield, IL 60015; (847) 405-2400; www.cfindustries.com.

CF INDUSTRIES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
7.13
vs.
2.78
+ 39%
195.48
-
128.03
11 - 7
Sep '11
5.16
vs.
1.34
+ 53%
188.61
-
115.34
13 - 8
Jun '11
6.87
vs.
3.18
+ 38%
192.70
-
134.40
18 - 12
Mar '11
3.50
vs.
-0.09
+ 134%
158.42
-
120.01
22 - 17
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
6.10
22.66
1.00
192.70
-
115.34
9 - 5
2010
3.97
7.21
0.40
138.74
-
57.56
19 - 8
2009
2.61
8.62
0.40
95.13
-
42.30
11 - 5
2008
3.92
7.81
0.40
172.99
-
37.71
22 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
89
93
100
88
36
82

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com