What To Expect From CF Industries' Earnings Report

NG_NM

 |  Apr. 27, 2015 10:22 AM ET  |  About: CF Industries Holdings, Inc. (CF)

Disclosure: The author is long CF. (More...)

Summary

• CF Industries is scheduled to report its first-quarter 2015 financial results on Wednesday May 06, after market close.
• Analysts are expecting on average a 3.1% EPS rise from its actual earnings for the same quarter a year ago.
• Considering the significant decline in the price of natural gas and the high demand for nitrogen, I believe that CF will beat analysts' estimates.

CF Industries (NYSE:CF) is scheduled to report its first-quarter 2015 financial results on Wednesday May 06, after market close.

CF has missed EPS expectations in the last four quarters as shown in the table below.

Data: Yahoo Finance

According to 19 analysts' average estimate, the company is expected to post a profit of $4.65 a share, a 3.1% rise from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $5.57 a share while the lowest is for a profit of $4.16 a share. Over the last 30 days, there have been two up revisions and no down revision. Revenue for the first quarter is expected to decline 13% year-over-year to $986 million, according to 14 analysts' average estimate.

Natural Gas Cost

Natural gas, which is the feedstock for CF's process, represents the primary cost for the company. In 2013, natural gas purchases accounted for about 43% of the company's total cost of sales of nitrogen fertilizers. According to the company, it is closely monitoring the natural gas market and assessing if or when it would hedge its gas exposure beyond the first quarter. At this time, CF is comfortable participating in the spot gas market.

CF Industries will continue to benefit from attractive North American natural gas prices. In comparison to feedstock costs in other regions of the world, cheap American natural gas continues to support CF Industries' higher producing margin. The average Henry Hub natural gas price in the first quarter of $2.87 per MMBtu is 20.2% lower than the fourth quarter 2014 average price of $3.59 per MMBtu. The average gas price so far in April is even lower at $2.64 per MMBtu, which will reduce even more production costs.

Henry Hub natural gas June 2015 leading contract

(click to enlarge)

Chart: TradeStation Group, Inc.

Ammonia Price

Ammonia revenue accounted for 33.2% of total revenue in 2014. The average ammonia market price of $615 per metric ton in the first quarter of 2015 was only about one percent lower than the average market price in the fourth quarter of 2014. However, the average CF selling price of ammonia in Q4'14 was lower at $559 per product ton. The small change in the market price of ammonia in the first quarter probably had not any adverse effect on the company's profit in the first quarter.

UAN Price

UAN revenue accounted for 35.2% of total revenue in 2014. The average UAN market price of $262 per metric ton in the first quarter of 2015 was almost the same as for Q4'14. The average CF selling price of UAN in Q4'14 was at $263 per product ton. Hence, a higher gross margin is expected for the UAN segment due to lower costs.

Granular Urea Price

Granular urea revenue accounted for 19.3% of total revenue in 2014. The average urea market price of $296 per metric ton in the first quarter of 2015 was 6.0% lower than the average market price of $315 per metric ton in the fourth quarter of 2014. However, the average CF selling price of granular urea in Q4'14 was higher at $358 per product ton. In any case, the lower market price of urea in the first quarter probably had an adverse effect on the company's profit in the first quarter.

Company Outlook

Along with its latest quarter earnings release from February 17, the company offered an outlook for the first quarter. According to CF, given the shortened fall ammonia application season across the northern U.S. and Canada, a significant volume of nitrogen will still need to be applied in the first half of 2015 to catch up to the overall levels needed to support the expected planted acres. The demand is reflected in the company's strong order book as shown by the increase in advance customer payments compared to the end of 2013.

Therefore, in my opinion, it is quite probable that the company will report revenue for the first quarter higher than the $986 million, which is analysts' average estimate. All in all, considering the significant decline in the price of natural gas, the high demand for nitrogen, and the small drop in the price of its products, I believe that CF will beat the average analysts' expectation for earnings of $4.65 per share.

Valuation

CF's stock has outperformed the market in the last year; since the beginning of 2014, CF's stock has gained 26.3%, while the S&P 500 index has increased 14.6%, and the Nasdaq Composite Index has risen 21.9%.

(click to enlarge)

Chart: TradeStation Group, Inc.

CF's valuation metrics are excellent, the trailing P/E is very low at 11.12, and the forward P/E is also very low at 11.28. Moreover, its Enterprise Value/EBITDA ratio is low at 8.27, and its PEG ratio is very low at 0.95.

The PEG ratio - price/earnings-to-growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

In addition, CF's Margins and Return on Capital parameters have been much better than its industry median, its sector median, and the S&P 500 median as shown in the tables below.

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(click to enlarge)

Source: Portfolio123

On February 04, CF Industries' Board of Directors declared a quarterly dividend of $1.50 per common share, an increase of 50% from its previous $1.00 per share. CF has been paying uninterrupted dividends since 2005. The forward annual dividend yield is at 2.04%, and the payout ratio is only 29.3%. The annual rate of dividend growth over the past three years was extremely high at 76.5%, and over the past five years, was also very high at 40.6%.

In addition, the company repurchased 1.4 million shares for $373 million in the latest quarter, resulting in the lowest shares outstanding ever.

Summary

According to CF, given the shortened fall ammonia application season across the northern U.S. and Canada, a significant volume of nitrogen will still need to be applied in the first half of 2015 to catch up to the overall levels needed to support the expected planted acres. Therefore, in my opinion, it is quite probable that the company will report revenue for the first quarter higher than the $986 million, which is analysts' average estimate.

Considering the significant decline in the price of natural gas, the high demand for nitrogen, and the small drop in the price of its products, I believe that CF will beat the average analysts' expectation for earnings of $4.65 per share.

CF Industries has excellent valuation metrics and strong earnings growth prospects; its PEG ratio is very low at 0.95. In addition, CF is generating strong free cash flows and returns value to its shareholders by stock buyback and increasing dividend payments. All these factors bring me to the conclusion that CF stock is a smart long-term investment.

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