Goldman On CF Industries: Waiting On The Sidelines

Goldman Sachs’ Adam Samuelson believes that the risk/reward for CF Industries Holdings, Inc. CF is balanced at present, given “persistent uncertainty on the global urea cost curve and near-term oversupply concerns as NA capacity additions peak over the next 9 months.”

Samuelson reinitiated coverage of the company with a Neutral rating and price target of $30.

Key Concerns

While acknowledging CF Industries’ robust free cash flow profile, the analyst mentioned that there also was increased earnings sensitivity to small prices changes for nitrogen.

Also, the company’s desire to maintain an IG credit rating was limiting a sharp increase in cash return to shareholders in the near term.

“We see persistent uncertainty on the global urea cost curve as broadly deflationary pressures from lower oil / natural gas / coal and USD strength have consistently pushed industry cost support lower over the past several years,” Samuelson cautioned.

Some Positives Too

On the other hand, the analyst pointed out that current pricing continued to be meaningfully below levels that would lead to the need for new investment.

“On our base case estimates, CF’s 4.3 percent dividend yield appears sustainable and 12 percent 2017E FCF yield is intriguing, though leverage concerns near-term may limit sizable cash return,” Samuelson said.

In addition, the company’s Donaldsonville, L.A., plant offers “unique export capabilities” for CF Industries to manage its domestic nitrogen market balance.