Will Fertilizer Fallout Hurt or Help CF Earnings?

CF Industries (CF +1.55%) will release its quarterly report next Tuesday, and the fertilizer company's stock has been volatile given some unusual weather patterns and other factors affecting fertilizer demand. Yet with a big shakeup in the fertilizer industry, the big question is whether CF earnings will continue to drop from recent peaks or benefit from the weakness of some of its competitors.

CF makes fertilizers in two primary segments: nitrogen-based fertilizer and phosphates. That division has helped it benefit from trends that have favored nitrogen fertilizers while maintaining a diversified portfolio. But perhaps the best move it has made is to keep its exposure to the potash industry at minimal levels, given recent turmoil in that part of the fertilizer market. Let's take an early look at what's been happening with CF Industries over the past quarter and what we're likely to see in its quarterly report.

Stats on CF Industries

Source: Yahoo! Finance.

Will CF earnings keep falling this quarter?
Analysts have had less optimistic views about the prospects for CF earnings in recent months, cutting their June-quarter estimates by almost 5% and their full-year 2013 views by nearly 6%. The stock has managed to overcome those headwinds somewhat, with a 4% gain since late April.

CF came into the quarter on a relatively positive note, with the company overcoming a slight drop in revenue by raising net income 10% to record levels. By taking advantage of rising prices for nitrogen fertilizer by ramping up its production almost to full capacity, CF was able to offset relative weakness in its phosphate business. Moreover, even with rising natural gas prices, CF's hedging strategy started producing unrealized gains, reversing earlier losses from hedging.

Still, the North American market has been a difficult one for fertilizer companies so far this year. In contrast to benign weather conditions last year that encouraged fertilizer use early in the season, this season's cold and wet conditions led to a late start, and both CF and Agrium (NYSE: AGU), both of which focus on North America, have needed to play catch-up. Yet with expectations for a strong planting season, farmers might well have simply deferred purchases into the second quarter, which in turn could lead to potential upside surprises.

The new variable in CF's business comes from the recent move from Russian fertilizer giant Uralkali to exit a major potash cartel, which could send potash prices plunging. Strong prices for high-margin urea ammonium nitrate made it CF's best performing product and helped boost rival CVR Partners (UAN +3.79%) as it makes plans to put just about all of its ammonia production toward urea ammonium nitrate. But with farmers having moved away from the potash-based fertilizers that PotashCorp (POT +0.00%) focuses on, CF might now see the reverse of that strategy hurt its business if farmers move back to potash as expected price declines make it look more attractive.

In the CF earnings report, look for comments from the company about hedge-fund investor Dan Loeb's recent purchase of the company's stock for his Third Point Management fund. With Loeb arguing the stock is cheap, investors have to feel confident that there's plenty of room for the stock to move higher despite -- or perhaps because of -- turbulence in the rest of the fertilizer space.

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