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CF Industries (CF) Down to Strong Sell: Time to Dump It?

On May 27, 2016, Zacks Investment Research downgraded fertilizer maker CF Industries CF to a Zacks Rank #5 (Strong Sell).

Factors to Consider

While CF Industries remains on track with its capacity expansion projects in Louisiana and Iowa, it continues to see pricing pressure in its nitrogen business. Lower selling prices weighed on CF Industries’ bottom line in first-quarter 2016 as the company saw a roughly 89% plunge in its profits.

Elevated supply in the global nitrogen market and weaker demand for ammonia globally pressured pricing in the quarter. Nitrogen prices are expected to remain under pressure in the near term due to higher supply.

Urea prices have been under pressure due to higher supply from Chinese producers. Global capacity expansion continues to exert pressure on urea and other nitrogen fertilizer prices, mainly urea ammonium nitrate (“UAN”).

Moreover, the recent termination of the deal to buy specific assets of Netherlands-based fertilizers and industrial chemicals producer, OCI N.V. represents a setback for the company. CF Industries and OCI terminated the planned combination of CF Industries with certain assets of OCI last week after the U.S. government’s new tax inversion rules scuppered the merger.

CF Industries, in Aug 2015, agreed to purchase the European, North American and Global distribution assets of OCI N.V. in a deal worth around $8 billion, including assumption of roughly $2 billion in debt.

The companies amended their merger agreement in late 2015 and changed the jurisdiction of incorporation and tax residency of the proposed combined company to the Netherlands from the UK after the U.S. government took certain steps to crackdown on tax inversions.

However, the U.S. Department of the Treasury announced additional actions to further curb corporate tax inversions in Apr 2016, aimed at reducing the economic benefits of inversion and slow the pace of inversion deals. CF Industries and OCI ended the merger as the Treasury actions “materially reduced” the structural synergies of the deal. The combined entity would have emerged as the world’s biggest publicly traded nitrogen company.

CF Industries also continues to operate with high debt level with long-term debt of roughly $5.5 billion at the end of the first quarter, up around 21% year over year. 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. The company is also exposed to intense pricing competition from both domestic and foreign fertilizer producers and volatility in raw material costs.

Other Stocks to Consider

Better-ranked companies in the basic materials space include Akzo Nobel N.V. AKZOY, Albemarle Corporation ALB and Koninklijke DSM N.V. RDSMY, all holding a Zacks Rank #1 (Strong Buy).

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ALBEMARLE CORP (ALB): Free Stock Analysis Report
KONINKLIJKE DSM (RDSMY): Free Stock Analysis Report
AKZO NOBEL NV (AKZOY): Free Stock Analysis Report
CF INDUS HLDGS (CF): Free Stock Analysis Report
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