We are upgrading our recommendation on CF Industries Holdings Inc. (CF) to Outperform from Neutral after the company posted excellent second-quarter 2011 results. CF Industries delivered $6.87 per share in the second quarter, striding ahead of the Zacks Consensus Estimate of $5.94. However, total sales of $1.8 billion missed the Zacks Consensus Estimate of $1.3 billion.
Cash and cash equivalents increased to $1.36 billion as of June 30, 2011 from $797.7 million as of December 31, 2010.
The company was also successful in reducing its debt to $1.61 billion as of June 30, 2011 from $1.95 billion as of December 31, 2010.
Management is expecting farm income to set a new record this year and believes that the farmers are going to plan a very large corn planting next year. The company expects the corn stocks-to-use ratio to remain in the mid-single-digits for the 2011 marketing year, supporting elevated corn prices. This should provide growers with a compelling incentive to reinvest some of their harvest income in crop inputs. CF Industries has a good forward order book with attractive margins.
CF Industries is a leading global producer of nitrogen and phosphate fertilizers. Since the Terra acquisition, the company has become the second largest producer of nitrogen fertilizers globally among publicly-traded companies, with 13.5 million tons of production capacity. CF is the largest nitrogen producer in North America and the leading producer of key products—ammonia, urea and UAN. CF owns the largest nitrogen facility in North America and has gained substantial interest (about two-thirds) in the second largest nitrogen facility in the US. Moreover, CF stands to benefit from market share gains. In 2008, the company proposed a nitrogen complex in Peru. The operation is expected to serve nitrogen markets on the west coast of Central and South America as well as Mexico. There is no nitrogen capacity in the region despite sizable demand, which gives the project huge organic growth potential.
In January, 2011, CF Industries entered into a definitive agreement to sell four dry product warehouses and related assets to GROWMARK Inc. and one of its subsidiaries. Over a number of years, CF Industries’ throughput utilization of these facilities declined significantly as an increasing portion of the company’s dry product volume was shipped directly to customers from manufacturing locations. CF Industries’ distribution facilities will continue to focus on their strong positions in storage and timely delivery of ammonia and UAN. In addition, CF Industries’ dry products warehouse in the Minneapolis/St. Paul area will continue to play an significant role in seasonal delivery of dry fertilizers.
CF Industries’ outlook for North American crop nutrient producers remains quite positive. The company expects to continue to earn attractive margins due to its focus on operational excellence and a favorable pricing environment, including prices (and margins), which are already fixed through forward sales.
Strong demand and tight inventories are expected to support crop prices and continuing high levels of plantings in 2012, particularly for corn and soybeans. Farm income is expected to reach record levels in 2011, breaking the previous record in 2010 and facilitating fall purchases of crop inputs.
Consequently, the company expects very strong demand for fall crop nutrient application if weather and field conditions permit.
The company anticipates that the global nitrogen supply/demand balance will remain tight in the second half of 2011, supporting historically high prices. Global phosphate supplies also are expected to remain tight in the near term as low Chinese export supply, production disruptions in North Africa, low channel inventories in the U.S. and large purchases by India offset the impact of capacity additions.
However, CF Industries faces stiff competition from Agrium Inc. (AGU), Potash Corp. of Saskatchewan Inc. (POT) and Koch Industries Inc.