This Fertilizer Major Could Set the Street on Fire Next Week

By Neha Chamaria - July 31, 2012 | Tickers: CF, DD, MON, POT, MOS | 0 Comments

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I'm eagerly waiting CF Industries' (NYSE: CF) numbers to come out next week. This is one company that’s poised to make the most from the ongoing agriculture boom, and I have high hopes that it could well rock the Street with astounding numbers. Here’s what to expect from CF.

Magical corn
CF looks set to churn out an excellent second-quarter top-line growth. Ask me the reason and I’ll answer it in one word: corn. The golden crop has proved to be CF’s lucky charm, simply because it consumes a large amount of nitrogen, a nutrient that defines the company. CF is the largest North American producer of nitrogen and derives its highest revenue from it.

The fact that corn plantations in the U.S. hit record highs this year isn’t news anymore. And we have already seen how companies with agri-based businesses have reaped the benefits through their recently released numbers. Seed king Monsanto (NYSE: MON) reported a stellar 17% jump in its third-quarter top line thanks to robust demand for its superior corn seeds and traits products. More recently, agriculture (read: corn) proved to be the saving grace for DuPont (NYSE: DD) by driving its agriculture division’s second-quarter sales by 13% from the year-ago period when its core chemicals businesses failed to deliver.

CF already gave us a fair idea of what high corn plantations can do to its bottom line when aggressive selling to tap early planting opportunities pushed its nitrogen division sales up by 37% during its first quarter. Considering that the planting season was yet to take off fully then, it wouldn’t be wrong to expect higher nitrogen sales from CF’s second quarter, which actually coincided with the peak planting season.

Pricey gains
Ammonia and urea sales volumes were at record first-quarter highs, which means a larger chunk of the nutrients were applied during the quarter as compared to last year. The effect of this is likely to spill over in the form of comparatively lower sales volumes for the nutrients during the second quarter. But at the same time, prices maintained a strong up trend throughout the period, with most nutrients gaining in double digits from last year. Higher prices is what I feel will be the key to CF’s strong top-line growth in the second quarter.

In particular focus is Urea Ammonium Nitrate, which has proved to be a highly profitable nutrient in recent times. Like in its previous quarter, I am expecting CF to have upgraded large amounts of ammonia produced to UAN. The company is aggressively adding capacity to convert more ammonia to UAN, a move very much in line with what UAN specialist CVR Partners is doing. CVR upgraded 72% of ammonia during the first quarter. CF too started converting additional amounts since two quarters, and we expect the company might tell us about further related plans in its upcoming earnings call.

The dampener
Phosphate could be a dampener, though. Although prices of DAP fertilizer have rebounded sharply in the past few months, gaining nearly 17% from their lows in March, they are still pretty off the highs seen around the same time last year. But volumes seem to be tightening, as evidenced by peer Mosaic’s (NYSE: MOS) recently released fourth-quarter numbers. Its phosphates sales volumes were up around 3.5% from last year, but 20% lower prices took the sheen away from its top-line growth.

CF’s phosphate volumes are likely to be better especially on a sequential basis as the first quarter was also a period when the company had curtailed production due to cautious buyer behavior.

Overall, I find analyst estimates of an 8.5% growth in CF’s top line pretty muted, considering the factors mentioned above. CF crushed Street estimates last time, and I won’t be surprised if it does it again.

Losing gas
One factor that has been playing a critical role in boosting margins for chemical and fertilizer players is the multi-year low natural gas prices. DuPont is expecting a significant dip in its costs this year because of lower natural gas and ethane prices. Second-quarter margins in PotashCorp’s (NYSE: POT) nitrogen division were much higher than last year thanks to low gas costs. 

For CF, a price change of $1 per MMBtu translates into a change of roughly $156.3 million in the company's "unrealized mark-to-market gain/loss" (pre-tax). Unfortunately, CF won’t gain as much because although gas prices are less than half of what it paid last year, the company had already hedged two-thirds of its natural gas requirements for the year by December 2011 when gas prices weren’t very low. In fact, chances of CF having incurred mark-to-market loss (pre-tax) on natural gas derivatives during the second quarter are high, a factor that could weigh on profits.

My Foolish takeaway
The Street is expecting a whopping 29.5% surge in CF’s bottom line. It doesn’t seem tough for the company to meet those estimates, though. Industry trends are largely favoring, and the stock has gained 36% year-to-date. Solid second-quarter numbers is all it needs to keep the momentum going. Click here to add CF to your watchlist to stay updated.

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