Will CF Industries Earnings Crush PotashCorp and Mosaic?

CF Industries Holdings (CF -0.04%) will release its quarterly report on Monday, and after a big swoon in the early summer, the fertilizer company's stock has rebounded sharply over the past few months. But even as rivals PotashCorp (POT) and Mosaic (MOS -0.51%) are facing unprecedented volatility from the breakup of a key Russian potash cartel, CF hopes that it will be able to weather a rise in natural gas prices from all-time low levels and still produce its nitrogen and phosphate fertilizers profitably well into the future.

CF Industries got a huge competitive advantage over Mosaic and PotashCorp when natural gas prices plunged, because as a key input to nitrogen-based fertilizer production, natural gas represents a huge part of a fertilizer company's total costs. But despite huge natural gas production levels domestically, prices have started to firm and that will inevitably reduce CF's edge over its rivals. In response, CF recently took some aggressive action that will change its product mix dramatically. 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 report.

Stats on CF Industries

Source: Yahoo! Finance.

What will hold CF Industries earnings back this quarter?
In recent months, analysts have pulled back on their views of CF Industries earnings, cutting both their third- and fourth-quarter estimates by about $0.60 per share and shaving 5% from their full-year 2014 projections. The stock has bounced back after big losses earlier in the year, climbing 10% since late July.

CF Industries came into the quarter with some uncertainties about its future. A drop of 1% in sales was nonetheless better than PotashCorp and Mosaic managed to achieve, but profits declined 18% as adverse weather conditions led to a sharp drop in prices for its urea-based fertilizers. CF did its best to substitute sales of higher-priced ammonia and urea ammonium nitrate, but natural gas still looms large over the company as a potential driver of overall costs.

One important aspect of CF Industries' business is that certain crops thrive better with nitrogen fertilizers, while others don't need them. Corn production, for instance, is tied heavily to nitrogen-based fertilizer use, while soybean growing doesn't need nitrogen. So far, corn prices have risen enough to give farmers incentives to grow the crop but not so much that users would buy soybeans as a substitute. Nevertheless, CF will have to look closely at the price dynamics of various crops in order to make sure its fertilizers remain relevant.

The biggest news for CF came just days ago when Mosaic agreed to buy CF's phosphate business for more than $1.4 billion. The move will lead both companies to move in opposite directions, with Mosaic seeking to diversify its hard-hit potash business with greater exposure to phosphate, while CF will essentially double down on the health of nitrogen fertilizers. The deal also involves supply agreements between CF and Mosaic that will help give CF greater stability in its nitrogen-fertilizer business in the years to come.

In the CF Industries earnings report, look to see whether it will suffer from the same conditions that have led PotashCorp to deliver disappointing earnings results and led Mosaic to give investors a profit warning for the quarter. Nevertheless, as long as world demand for food continues to rise, CF's long-term prospects should remain strong even if shares dip in response to short-term struggles for the fertilizer company.

Click here to add CF Industries to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.