On Nov 11, we retained our Neutral recommendation on
). While the company should gain from lower natural gas costs in
North America, we remain on the sidelines considering pricing
pressure, near-term challenges in its phosphate business and high
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Adjusted earnings for the third quarter of 2013, reported on Nov
4, beat the Zacks Consensus Estimate. However, revenues fell by
double-digits on lower fertilizer pricing and competitive
pressure and missed expectations. The company saw declines across
its nitrogen and phosphate businesses in the quarter.
CF Industries, a Zacks Rank #3 (Hold) stock, should benefit from
declining natural gas costs in North America and a solid start to
the domestic planting season. Moreover, the company has a strong
cash flow profile, which allows it to return value to
shareholders and invest in growth initiatives.
Low-cost North American natural gas has been an advantage for CF
Industries. The company's Nitrogen segment is enjoying the
benefit of abundant natural gas supply. Moreover, CF Industries
is expected to benefit from strong U.S. corn plantations.
In addition, the acquisition of Viterra Inc's 34% interest in the
Medicine Hat nitrogen facility underscores CF Industries'
strategy to invest in lucrative projects. Following the
acquisition, CF Industries' annual marketable nitrogen volume
rose by around 425,000 gross tons of ammonia and 275,000 tons of
urea. The company is also progressing with its capacity expansion
projects in Louisiana and Iowa.
However, weakness in CF Industries' phosphate business is
expected to sustain through 2013. Lower domestic and overseas
demand is hurting phosphate volumes and pricing, as seen in the
CF Industries expects phosphate prices to remain constrained
through the balance of 2013 due to weak international demand,
especially from India. Unfavorable subsidy for phosphate products
is hurting Indian phosphate imports. Moreover, oversupply in the
market, especially from Chinese export producers, is putting
pressure on the urea market and pricing.
CF Industries also faces intense price competition from both
domestic and foreign fertilizer producers. The prices of its
products are highly sensitive to demand and supply. CF Industries
is also exposed to volatility in raw material costs and has
Other Stocks to Consider
Other companies in the basic materials sector worth considering
Asahi Kasei Corporation
The Scotts Miracle-Gro Co.
). While Methanex and Asahi Kasei hold a Zacks Rank #1 (Strong
Buy), Scotts Miracle-Gro retains a Zacks Rank #2 (Buy).