MEOH Methanex Corporation

On Feb 20, we issued an updated research report on CF Industries (CF). While the fertilizer company should benefit from lower natural gas costs in North America, we are concerned about pricing pressure, high debt level and near-term challenges in its phosphate business.

  

CF Industries, a Zacks Rank #3 (Hold) stock, posted better-than-expected fourth-quarter 2013 results on Feb 18 with both revenues and adjusted earnings beating the respective Zacks Consensus Estimate. However, revenues and profit fell year over year on lower fertilizer pricing. The company saw declines across its nitrogen and phosphate businesses in the quarter.

 

CF Industries should benefit from favorable natural gas costs in North America and a solid start to the domestic planting season. Moreover, the company has a strong cash flow profile, which allows it to return value to shareholders and invest in growth initiatives.

 

Low-cost North American natural gas has been an advantage for CF Industries. The company’s Nitrogen segment is enjoying the benefit of abundant natural gas supply. Moreover, CF Industries is expected to benefit from strong U.S. corn plantations.

 

Moreover, the acquisition of Viterra Inc.'s 34% interest in the Medicine Hat nitrogen facility underscores CF Industries’ strategy to invest in lucrative projects. Following the acquisition, CF Industries’ annual marketable nitrogen volume rose by roughly 270,000 net tons of ammonia and 275,000 tons of urea. The company also remains on track with its capacity expansion projects in Louisiana and Iowa. It plans to spend roughly $2 billion on capacity expansion projects this year.

 

However, CF Industries faces intense price competition from both domestic and foreign fertilizer producers. The prices of its products are highly sensitive to demand and supply. CF Industries is also exposed to volatility in raw material costs and has significant debt.

 

While CF Industries is divesting its Phosphate unit to Mosaic (MOS), weakness in this business is expected to sustain in the near term. Phosphate prices are expected to remain constrained due to weak international demand, especially from India. Unfavorable subsidy for phosphate products is hurting Indian phosphate imports. Moreover, oversupply in the market, especially from Chinese export producers, is putting pressure on the urea market and pricing.

 

 

Other companies in the basic materials sector worth considering include Methanex Corporation (MEOH) and The Scotts Miracle-Gro Co. (SMG). While Methanex holds a Zacks Rank #1 (Strong Buy), Scotts Miracle-Gro retains a Zacks Rank #2 (Buy).