CF Industries Does it....Again!

On October 29th, CF Industries (CF) was my #1 position - which I held into earnings. The title of my post that day was '#1 Position CF Industries (CF) Monster Quarter'

This is what they did in October

Estimates $537M revenue, and $0.97 EPS
Actual $583M revenue, and $1.52 EPS

Well, I hate to plagiarise myself, but ANOTHER even MORE MONSTER quarter. This is what they just did

Estimates $796M revenue, and $1.67 EPS
Actual $852M revenue, and $2.38 EPS

Wow. Just wow. And to think this company has a 10 PE multiple on it. Pathetic.

This is not my #1 position but I added as I wrote earlier [Bookkeeping: Adding Fertilizer] and took it up to a 4% stake. Now we can listen to the bears talk about natural gas costs and the coming end of the agriculture boom. And just say wow.

One day the analysts will catch up to these fertilizer names and get the earnings estimates correct. But as I said with Mosaic (MOS), as I said with Potash (POT) - that day is still not here. So we walked into the day with $9.25 in 2008 EPS and at $106, a forward PE of 11.5. Obviously 2008 EPS analyst estimates are total trash (again) - they are up from total trash $6.35 90 days ago by the way - and away we go.

We just got cheaper instantly. Not to mention gross margin explosion which is the whole secret to the fertilizer industry. This is a company growing in excess of 100% year over year, for a 10 multiple. Of course growth will slow in the future but please? Can't we bear a 16 PE? 20? If not, someone is going to come in and buy this type of company.

• Sales and net income highest for any quarter since company’s August 2005 IPO
• Net sales rose to $852.5 million, up 62 percent from fourth quarter 2006, driven by substantially higher prices and increased nitrogen volumes
• Operating earnings totaled $214.2 million, compared to $10.9 million in fourth quarter 2006
• Net income totaled $135.4 million, or $2.38 per diluted share, compared to $8.0 million, or $0.14 per share, in fourth quarter 2006
• Fourth quarter results included $12.9 million in non-cash, pre-tax unrealized gains, or $0.15 per diluted share on an after-tax basis, from mark-to-market adjustments on natural gas derivatives. The gains compare to $9.4 million in non-cash, pre-tax unrealized losses, or $0.10 per diluted share on an after-tax basis, for mark-to-market adjustments included in fourth quarter 2006 results
• Gross margin increased more than five-fold from the fourth quarter 2006 level to $236.0 million.
• Board approves increase in regular quarterly dividend to $0.10, up from $0.02 per share

How's the future looking? Not too shabby

• Record grain prices and robust worldwide demand for fertilizer point to strong spring season
• Company’s forward bookings substantially higher than levels a year ago
• “Looking to the spring planting season, the fundamentals that drove our strong 2007 performance look even better for the farm economy and the company in 2008,” CF Industries’ Wilson noted.
• “Prices for most major crops remain at record or near-record levels, providing an incentive for farmers to maximize planted acreage and to optimize fertilizer application this spring. And despite today’s high fertilizer prices, these crop prices clearly should support excellent farm economics in 2008, coming on the heels of 2007’s record farm income,” he commented.
• Predictions from some agricultural economists point toward lower corn acreage in 2008, with expectations generally for 88 million to 89 million acres, down from the near-record 93.6 million acres planted in 2007. Putting that into perspective, the planned acreage would still be well above the 79.1 million acre average planted during the 1997-2006 period.
• Wilson also noted that the United States Department of Agriculture is predicting increased acreage for other nitrogen-consuming crops such as wheat and sorghum in 2008. Both crops are enjoying strong prices, and increased acreage for them could reduce any negative effect on nitrogen demand caused by the expected reduction in corn acreage. Strong crop prices are also expected to push up nitrogen application rates for corn and other crops as farmers attempt to maximize yields.
• Wilson added that corn demand for ethanol production is expected to increase by 30 percent from 2007 levels this year, with much of the increase required to meet federal mandates under the Renewable Fuels Standard. Margins on ethanol production are currently below the record levels achieved last year, but they remain positive.

“I’m extremely pleased by the results we delivered for both the fourth quarter and the year. Strong domestic and international grain markets have produced exceptionally high global demand for fertilizer. Tightness in this demand-driven market pushed fertilizer prices sharply higher for all of our products. In this environment, effective execution of our operating and sales plans delivered our best-ever public company sales and earnings performance,” commented Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc.

“The weather cooperated perfectly during the fall season, and the combination of good levels of fall fertilizer application and normal customer inventory stocking for the spring season helped us ship nearly 2.5 million tons of nitrogen and phosphate fertilizer during the fourth quarter, almost 170,000 tons more than in the year-earlier quarter,” Wilson added.

And now the bear case - all in 1 paragraph (but again, these costs will be passed through to end customers through higher prices)

• CF Industries, along with other phosphate producers, is facing significantly increased input costs, especially for sulfur. Increased sulfur demand from the phosphate and metals industries, coupled with outages at several major Gulf Coast refineries that produce sulfur, have tightened the market. The company believes the supply/demand balance for sulfur could become more favorable to users later in 2008 when refineries are expected to be producing sulfur at higher rates.

Overall?

• “Looking ahead to the first half of 2008, questions remain regarding corn acreage, sulfur cost, and the strength of the general economy. However, taken against the backdrop of low grain stocks worldwide, high grain prices, record farm economics, and robust global markets for nitrogen and phosphate fertilizers, we’re looking at the first half of 2008 with excitement and optimism. We’re well positioned to serve our customers in this strong agricultural market,” Wilson added.

Well I'll go enjoy this 70 cent beat while bears start whining about increases sulphur and natural gas costs.... if you are new to the fertilizer area all of these companies earning reports have a bevy of data in it, well worth the read. I only took the main highlights into this blog entry.

Disclosure: Long CF Industries, Potash, Mosaic in fund and in personal account