Citi Moves CF Industries To Neutral, Says Near-Term Outperformance 'May Be Difficult'

CF Industries Holdings, Inc. (NYSE:CF) shares have jumped 42 percent over the past year, prompting a downgrade by Citi on valuation.

The Analyst

Citi analyst P.J. Juvekar downgrades shares of CF Industries from Buy to Neutral and lowered the price target from $47 to $45.

The Thesis

CF Industries shares are factoring in urea prices of $300 per ton in 2019 as opposed the $270 per ton Citi is modeling that assumes more "mid-cycle" type multiples, Juvekar said in a Tuesday note. (See the analyst's track record here.) 

Flat urea prices would be a negative for investors, who are bracing for better near-term conditions, as higher U.S. urea prices are needed to attract imports ahead of planting, the analyst said. 

Some of the factors that drove Citi's upgrade of urea prices from $160 per ton last summer to $250 per ton may dissipate, leading to lower prices, Juvekar said. 

"Tactically, given the run in CF shares we think it may be difficult for near-term outperformance to continue in a falling urea price environment." 

Citi assumes a 30-percent sequential decline in urea prices into the third quarter. In the long run, Citi projects favorable trends due to urea supply growth from 2018-2021 that appears to fall consistently beneath long-term demand growth.

Although marking its first-quarter earnings per share estimates to market, Citi said its 2018-2022 earnings per share estimates are "mostly unchanged."

Citi's bull-case scenario sees upside to $55 with strengthening urea prices, while its bear case has shares dropping to $35 in the event of weakening urea prices. 

In the agricultural space, the firm said it likes FMC Corp (NYSE:FMC) and Nutrien Ltd. (NYSE:NTR).

The Price Action

CF Industries shares were down 3.51 percent Tuesday afternoon. 

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