Earnings Scorecard- CF Industries - Analyst Blog

Fertilizer company CF Industries Holdings Inc. (CF) reported second quarter 2010 results that fell short of analysts’ expectations. Earnings per share missed the Zacks Consensus Estimate by a significant 65 cents. However, CF’s shares rallied on the Terra Industries acquisition, which concluded at the beginning of last month.
 
Terra Acquisition
 
After a year-long battle, CF Industries has finally acquired its Iowa-based rival Terra Industries, and now owns more than 90% of Terra. CF had been wooing Terra since January 2009. The transaction is an all-stock deal for a total amount of $4.7 billion. Terra specializes in nitrogen production in the Midwest and Canada. The combined entity is a global leader in nitrogen fertilizer manufacturing, with a total capacity of 6.3 million nutrient tons of nitrogen and 2.1 million nutrient tons of phosphate.
 
Furthermore, the transaction would generate $105 million–$135 million in annual cost synergies from lower selling, general & administrative costs by optimizing transportation and distribution systems, and through greater economies of scale in procurement and purchasing. CF expects to realize the cost synergies within two years of integration.
 
The recent earnings announcement, analysts' estimate revisions and the Zacks ratings for both the short-term and the long-term are covered below.
 
Earnings Report Review
 
CF Industries Holdings Inc.’s net earnings more than halved to $105.1 million or $1.54 per share in the second quarter of 2010 compared with $213 million or $4.33 per share in the year-ago period. The recent acquisition of Terra Industries weighed on the earnings of CF. Excluding a one-time charge related to the acquisition, the company earned $2.51 per share, significantly below the Zacks Consensus Estimate of $3.16.
 
CF’s top line jumped 32% year over year to $1.3 billion (including Terra’s net sales of $526.3 million). CF Industries recorded revenues of $780.7 million on a stand-alone basis, which fell short of the Zacks Consensus Estimate of $1.2 billion. Lower average nitrogen selling prices and phosphate volumes offset the benefits of higher average phosphate selling prices and nitrogen volumes.
 
(Read our full coverage on this earnings report: CF Falls Far Short of Estimates - Zacks.com)
 
Agreement of Estimate Revisions
 
Following the second quarter earnings release, analysts maintained a negative outlook on CF. Concerns over lower nitrogen selling prices and declining phosphate volumes overshadowed the long-term benefits of the Terra acquisition.
 
We see the majority of downward revisions during the last 7 days. Of the 10 analysts covering the stock, four provided negative revisions to their earnings estimate for the third quarter and fourth quarter of 2010. For the full year 2010, three of the 6 analysts covering the stock lowered the estimate

Over the last month, one analyst enhanced while two analysts downgraded their forecasts for the next quarter and full year 2010. Concerns over lower nitrogen selling prices and declining phosphate volumes overshadowed the long term benefits form the Terra acquisition.

Our Recommendation
 
CF Industries has a leading market share in many key fertilizers. It is prepared for a reasonably good application season due to attractive corn farming economics, and the needed restocking by downstream fertilizer channels. The acquisition of rival Terra Industries made CF a global leader in the nitrogen fertilizer industry, which has seen strong consolidation trends. The company is set to achieve significant cost synergies with the integration of the Terra business, which should boost profitability.
 
However, CF Industries is susceptible to higher natural gas costs and faces intense competition. Lower nitrogen selling prices and lower phosphate volumes primarily affected earnings in the second quarter of 2010. Results missed the Zacks Consensus Estimate by a significant 65 cents.
 
Currently, CF Industries has a short-term (1 to 3 months) Zacks #3 Rank (“Hold”) and a long-term (6+ months) Neutral recommendation.
 
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at http://www.zacks.com/education/