I'm eagerly waiting for CF Industries'
Natural gas prices have been on a wild downswing lately, hitting decade-low levels. This is a big boon for chemical makers, as natural gas is a key input for them. Chemical giant DuPont
Softer natural gas prices were the primary reason behind the astounding 79% jump in CF's gross profit in the fourth quarter. But the advantage might not play out as significantly this time. That's because although gas prices are currently almost half of what CF encountered in its fourth quarter, the company had unfortunately hedged a major portion of its natural gas requirements for this year by December. Which means that it has lost out on a good opportunity to lower costs.
Set to head north
But that doesn't mean CF is in a tough spot. Its revenue looks set to rise as prices of nutrients are still strong. Take urea for instance. By hedging, CF has limited its urea production cost to below $150 per ton. Now picture this. From a bottom of around $350 in December 2011, urea prices were up 15% by March. So margins should continue to be good.
Similarly, urea ammonium nitrate (UAN) prices have been heading north in recent months, which should be an added benefit for CF. So profitable is the nutrient that, like peer CVR Partners
Phosphate could be a dampener, though. The price of DAP fertilizer, for instance, has fallen more than 5% year-to-date. Peer Mosaic
Overall, analysts are expecting CF's top line to climb by a mild 7.5% in the first quarter. But if CF has managed to take advantage of the early planting season that kicked off in the U.S. by selling more, it could surprise us with heavier top-line growth.
The Foolish bottom line
CF could make a killing if the U.S. Department of Agriculture's predictions of record corn plantations come true. A good start to the planting season, rock-bottom stockpiles of critical crops like corn, and global buyers stepping up fertilizer purchases -- things are on fire.
It's a win-win situation for CF, as everything seems to be working in its favor. Its shares have gained 30% year-to-date, but if CF fails to impress the Street next week, worry not. You'll know it's an opportunity to bet on a fundamentally strong company.
I can't wait to cover CF's earnings in detail. In the meantime, to get more earnings-season insight, check out our brand-new free report "5 Stocks Investors Need to Watch This Earnings Season." It details what to look for from Apple and four other must-watch companies as they report their latest results. Get access right now.