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CF Industries (CF): Will Weak Prices Dent Earnings Again?

CF Industries CF will release its first-quarter 2016 results after the bell on May 4.  

In the last quarter, the fertilizer maker had delivered a negative earnings surprise of 11.63%. Profits tumbled roughly 89% in the quarter, hurt by lower fertilizer prices. Sales fell year over year, but managed to beat expectations. Lower pricing across most segments weighed on the top line in the quarter.

Let’s see how things are shaping up for this announcement.

Factors to Consider

CF Industries, in its last earnings call, said that it expects overall nitrogen fertilizer demand in North America to remain steady on a year over year basis in 2016 as an expected increase in corn acres will be offset by a projected decline in wheat acres.

CF Industries continues to see pricing pressure in its nitrogen business. 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”).

Elevated supply in the global nitrogen market is pressurizing prices, causing farmers to delay buying activities. Moreover, the devaluation of the Chinese currency and reduced coal prices have contributed to a decline in urea prices.   

Lower prices for nitrogen fertilizer weighed on CF Industries’ bottom line in the last reported quarter and are expected to remain a headwind in the March quarter. Abundant global supply contributed to lower pricing across the company’s ammonia, granular urea and UAN units in fourth-quarter 2015, leading to double digit declines in sales in these businesses. Revenue weakness across these businesses may continue to put pressure on the company's top line in the first quarter, thereby affecting its profits.

Nevertheless, CF Industries remains on track with its capacity expansion projects in Louisiana and Iowa. Both projects will expand the company’s production capacity by 1.7 million tons or 25%. CF Industries plans to spend roughly $1.2 billion in 2016 on capacity expansion projects.

The company, in Mar 2016, announced the start-up of its new UAN plant at its Nitrogen Complex in Donaldsonville, LA. The plant, which became operational in early March, has achieved consistent, stable operation and produced more than 80,000 tons of UAN since start-up. The start-up of the UAN plant is part of the company’s major capacity expansion projects in North America. It is the second new plant to be commissioned and also the biggest operating single-train UAN plant globally.

The proposed acquisition of the specific assets of Netherlands-based fertilizers producer – OCI N.V. – also represents a significant move by CF Industries. The merger will create a global nitrogen behemoth and is expected to boost CF Industries’ production capacity by 65%. It will also extend the company’s portfolio into the rapidly growing methanol market.

CF Industries expects to achieve around $500 million (post-tax) in annual run-rate synergies from the transaction (expected to close in mid-2016) through optimization of operations, capital and corporate structure. The company also expects to achieve meaningful cost reduction and operational efficiencies by leveraging the most extensive distribution network in North America.

Earnings Whispers

Our proven model does not conclusively show that CF Industries is likely to beat estimates this quarter. This is because a stock needs to have both a positive  Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP for CF Industries is -11.77%. This is because the Most Accurate Estimate is 45 cents, while the Zacks Consensus Estimate is pegged at 51 cents.

Zacks Rank: CF Industries’ Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings surprise.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

The Scotts Miracle-Gro Company SMG has an Earnings ESP of +1.12% and a Zacks Rank #2 (Buy).
 
Orion Engineered Carbons SA OEC has an Earnings ESP of +13.79% and a Zacks Rank #3.
 
Albemarle Corporation ALB has an Earnings ESP of +1.18% and a Zacks Rank #3.

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