CF Industries Earnings Spoil Investors Again

Fertilizer manufacturer and distributor CF Industries (NYSE: CF  ) reported record earnings after the market closed yesterday. Actually, the company set new watermarks for sales, EBITDA, and EPS, too. Given the strong performance across the company's business segments, investors would have a difficult time finding reasons to complain. However, with nutrient markets on a tear in recent years investors may be wondering: "How long can this ride last?"

Financials
CF Industries left 2012 behind by posting the following improvements in performance over the previous year:

 

4Q11

4Q12

2011

2012

Net Sales

$1,718 million

$1,481 million

$6,098 million

$6,104 million

Total Expenses

$45.6 million

$47.6 million

$155.3 million

$201 million

Net Earnings

$502.2 million

$355.3 million

$1,761 million

$1,923 million

Diluted EPS

$6.66

$7.40

$21.98

$28.59

Source: CF Inudstries

The company continued to spoil investors by besting full-year 2011 EPS by 30% and completing a $500 million share repurchase program announced in 2011 ahead of schedule. Total capital expenditures tallied up to $523.5 million last year, which were easily absorbed by sales.

Earnings were favorably affected by a $74.6 million gain on natural gas prices, or $0.72 per share, and a $10.9 million gain in employee post-retirement benefits, or $0.10 per share. A previously terminated credit facility contributed a $15.2 million charge, or $0.15 per share.

Financials: outlook
An exceptionally strong balance sheet allowed the company to commit $7.7 billion to future growth and opportunities. Included in that figure is a new $3.0 billion share repurchase program through 2016 and a $3.8 billion cash pool set aside for expanding nitrogen production capacity. That is great news since nitrogen will be a strategic weapon for farmers heading into this growing season.

After a historic drought last summer the company expects the country's decimated stocks of the big three crops – corn, soybeans, and wheat – to keep crop selling prices high. Farmers eager to dig out of a hole from the previous harvest should be encouraged to plant record amounts of crops in 2013, which will keep fertilizer prices comfortably high for CF Industries.

Phosphate, which the company sells globally, is not doing as well as nitrogen. Gross margin fell 54% in the fourth quarter compared to the year-ago period. While producers around the world have scaled back production, management at CF Industries fully expects the market to improve later this year. A strong soybean planting in South America this past fall and improving demand from India are expected to drive the phosphate recovery.

Investors will need to accept much higher capital expenditures, or capex, in 2013 as the company tackles its nitrogen expansion projects. The $523.5 million in capex for 2012 will soar to between $1.45 billion and $1.75 billion in 2013. Remember, management has informed investors of the scope of the projects well beforehand, so there should be no surprises. In the end, the greatly increased nitrogen capacity will be well worth it as long as prices remain favorable.

Nitrogen
The nitrogen segment at CF Industries sold roughly the same amount of products in 2012 as in the prior year, but got a big boost in margins from favorable natural gas contracts.

 

2011

2012

Tons of Product Sold

13,002,000

12,969,000

Cost of Natural Gas

$4.28 per million BTU

$3.39 per million BTU

Gross Margin

51.1%

57.2%

Source: CF Industries

The company enjoyed average selling prices for its nitrogen products that closely mirrored those realized in 2011. In fact, the company produced 640,000 tons more nitrogen in 2011 than it did last year, meaning it reached for inventory more frequently during plant expansions.

CF Industry's wholly owned subsidiary Terra Nitrogen (NYSE: TNH  ) also reported earnings yesterday, but fared a little worse. Similar to CVR Partners (NYSE: UAN  ) , the master limited partnership's small size allows it to specialize solely in high-value nitrogen and return large amounts of cash to shareholders. However, the narrow focus also reduces flexibility, which comes in handy when market prices turn south. 

Phosphate
As noted above, margins for the segment sank as CF Industries got slapped with lower phosphate selling prices and higher production costs.

 

2011

2012

Tons of Product Sold

1,922,000

2,035,000

Gross Margin

30.6%

19.8%

Source: CF Industries

The company sold 78% of its phosphate to American farmers in 2012, down slightly from 82% in 2011. Similar to its nitrogen segment, production was down at phosphate mines and upgrading facilities compared to 2011 as the company looked to inventory during planned plant turnovers.

A look around
Investors not wanting to trade the sky-high yields of CVR Partners or Terra Nitrogen for the added flexibility and low yield of CF Industries may want to consider Agrium  (NYSE: AGU  ) . The company, which reports earnings this Friday, is slightly larger than CF Industries, operates in the nitrogen, phosphorous, and potassium (potash) markets, and pays a respectable 1.9% dividend. The company's diversity comes at the price of lower product volumes, but an increased focus on efficiency throughout the industry will pay dividends for Agrium as well.

Foolish bottom line
Should the phosphate market improve heading into 2014 as management expects and nitrogen capacity expansions be met with sustained prices for nitrogen products in the future, CF Industries will become an even bigger cash-spewing monster for investors. It may be difficult to believe, but it is well within the realm of possibility. While fertilizer and nutrient markets are cyclical – and both are currently in the upswing – I don't see the world's need for food subsiding anytime soon. Investors should enjoy a job well done with CF Industries and look forward to continued success in the next year or so.

With less and less arable land available around the world, increasing yields from existing plots will become vitally important to keep up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has several barriers to entry established that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's new premium research report on PotashCorp, in which we cover precisely what these barriers to entry are and detail several other key reasons why this company presents such a compelling investment opportunity today.


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  • Report this Comment On February 24, 2013, at 4:46 PM, RetiredInSalida wrote:

    Comments: I don't get this.... CF Industries released their last quarter earnings on Tuesday afternoon the 19th that showed their earnings had fallen substantially. Yet you published this article on the next day - after their stock dropped resoundingly!

    In fact, CF Industries stock has dropped 14% since mid January - 5% just this morning, a couple hours before the Motley Fool released this article. When I looked further into Motley Fool, the article above was just a reprint that was originally written in early January.

    Why would you do this?

    Rich

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