CF Industries Delivers - But Will the Weather Play Along?

Includes: CF, TNH
by: Chris Damas
CF Industries Holdings (NYSE:CF) released the kind of Q1 financial results that we have been predicting since the merger with Terra over a year ago. The company earned an adjusted $3.82 per share in EPS, exceeding Street average estimates for $3.18, on $1.17 billion in revenue (versus $1.2B consensus).
Cash Flow per Share before Working Capital Changes, our preferred operating metric, clocked in at $405.8 million, or $5.61 per share. Given the Q1 is a slow pre-season quarter more dominated by industrial A.A. with lower margins, this was an impressive result. Our estimate for CFPSWCC for all of 2011 made last fall was $23.25 on $5.4 billion revenues, with an $186 stock price target, subject to a “normal weather/crop year."
CF compares its Q1 results to the prior year quarter excluding the Terra acquisition, which closed in early April. If we include Terra’s Q1 2010 results, CF’s latest quarterly revenues were up 28.8% year/year and cash flows were up 240.8%. This represents an impressive surge in cash flow, largely driven by excellent agricultural nitrogen pricing, agricultural demand and improving industrial demand, delivery and low natural gas prices.
We tentatively had increased our expected number to closer to $30 and maintained a $180 target a month ago, but given the twin events of bad weather this spring in Canada and the US, and the black swan “flash crash” in precious metals and oil this week, we are sticking with the original target. I think the stock is a buy here (closed at $129.54 but up to $133.22 in pre-market), which would provide a 35% return.
The historic flooding in the Red River, Ohio, Mississippi and other river basins threatens nearby crop acreage and make logistics in moving product more difficult. The governor of Tennessee declared a state of emergency with flooding in Missouri, requiring the Army Corps of Engineers to detonate holes into the levee to save towns along the convergence of the Mississippi and Ohio rivers. The water levels are receding near Cairo, Illinois, so it seems to be working. We also have flooding in South Dakota up to Manitoba along the Red River.
The constant rain and even late-spring snow has delayed corn planting. The USDA indicated corn planting had progressed at an average of only 13% for the top 18 producing states as of May 1, versus a five-year average of 40%. The farmers in Iowa, Minnesota, Michigan, Wisconsin and Ohio had yet to start planting.
This could be a blessing in disguise now, as flooding along the river banks will eventually recede and allow planting, rather than expensive replanting. USDA Secretary Tom Vilsack affirmed the government would cover any lost crops caused by actions to reduce the flood along the bloated Midwest river network.
US Midwest farmers are seeing a dry day today, although there was overnight frost last night in Northwestern Illinois. With more warmth in the soil going forward, corn planting should be able to proceed more quickly.
If this is a rerun of 2008, the floods will turn out to be less damaging than feared and farmers will be able to get their crops in by the end of May, which is the absolute deadline before yields become depressed.
December new crop contracts would seem to agree the corn will not be damaged, and are trading at $6.45/bushel, down 11 cents. The sharp downward movement in the near-term July contract ($6.98 versus over $7.50 before this week) is being caused by some of the long liquidation by commodity hedge funds.
CF reported 2.84 million (short) tons of nitrogen product sales versus 3.4 million in the seasonally strong previous quarter of Q4 2010. Nitrogen gross margin was $442.5 million versus an adjusted $389 million in Q4. Phosphate sales were 440,000 st versus 477,000 in Q4 2010. Phosphate gross margin was a respectable $82.5 million versus $63.3 million last quarter, for a gross margin per ton of $187.50.
CF continued to improve its balance sheet, paying off $346 million in debt which was the rest of the term loan taken on for the Terra purchase. The company paid off $1.2 billion in debt over the last 12 months, leaving $1.6 billion in senior notes which are not due until 2018 and 2020. Net of cash, net debt is $1.23 billion.
We would expect CF to start buying back shares with excess cash balances at the end of the crop year.
The company holds its AGM next Wednesday and goes “ex” a 10 cent dividend the following day.
Given the correction in commodities is probably nearer its end than beginning, and with the big DJIA surge expected this morning, we are buying CF Industries this morning at prices below $133.
As a side note, 75% CF-owned subsidiary Terra Nitrogen (NYSE:TNH) also reported excellent results, with Q1 sales of $196 million and net earnings of $120.9 million. TNH is a pure play on nitrogen fertilizer, as it owns the Verdegris Oklahoma plant complex.
TNH declared a record Q1 distribution of $4.84, which also goes ex next Thursday. About half of this distribution is a working capital adjustment and not indicative of a higher distribution rate.
Nevertheless, we expect the LP units will provide at least $10/unit in distribution and therefore provide a yield of 9% for all of 2011. The units are illiquid and volatile, but we may buy some units -- which closed at $108.94 -- for a quick flip, depending on the opening price (i.e. less than, say, $112/unit).
Note: We covered our S&P 500 short positions yesterday, and it looks like that was a good thing.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CF, TNH over the next 72 hours.