On July 28, CF Industries Holdings (CF) reported net earnings of $5.02 per diluted share for the first quarter versus $1.65 per share for the same quarter a year ago. Strong domestic and international grain markets have produced an exceptionally high global demand for fertilizer, translating into substantially higher selling prices for all the products.
The company is optimistic about its phosphate business where the market is expected to remain tight near term due to healthy offshore demand growth in India and Brazil as well as higher application rates in the US. This is likely to lead to higher prices and cash margins for various fertilizers. In addition, the company is likely to benefit from the proposed nitrogen facility in Peru. We rate CF Industries shares a Buy and set a price target of $175.00.
The company has one of the largest market shares in the US corn-belt, making CF the closest pure-play on potential growth in US corn acres tied to ethanol production. Low stocks, new demand for corn that has created the largest corn crop since 1944, significantly increased acreage and fertilizer application rates have a positive impact on phosphate prices.
The fertilizer market is intensely competitive, based principally on delivered price and to a lesser extent on customer service and product quality. In addition, there is significant competition from products sourced from other regions of the world where natural gas costs are low. There is acute competition from foreign-sourced products with regard to urea because it is a widely traded fertilizer and there are limited barriers to entry.
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