CF Industries: There's Still Room for Upside

When I looked at analysts' forecasts for CFIndustries' (NYS: CF) first-quarter top-line growth some days back, I thought they were a little too conservative. Given the strong start to the U.S. planting season, CF was in a very good position to bump up its top line. And it did, crushing Street estimates by a gaping margin.

No wonder then that its shares hit a 52-week high post-results. But is CF still a good bet? I think it is. Here's why...

Corn to lift it
Corn should continue to weave magic for CF, as it consumes a large amount of nitrogen -- a nutrient CF is the largest North American producer of, and derives highest revenue from. Unusually warm weather in March encouraged farmers to get their planters out early, thereby pushing up demand for nutrients. CF's nitrogen sales were up 37% from the year-ago quarter.

Recent industry developments are suggesting that U.S. corn plantations could indeed hit record highs this year. Needless to say, CF could make a killing if this indeed is the case. I would keep an eye on the second quarter in particular, when the planting season is in full swing.

Betting on UAN
Thanks to CF's great marketing and distribution efforts, sales volumes of ammonia and urea were at record first-quarter highs. At the same time, prices of nutrients are holding up, too. Ammonia and urea prices were 21% and 24% higher, respectively, while urea ammonium nitrate fetched 9% more for the company. But UAN is more profitable than the others, and its prices, fortunately, have been rising steadily since last month.

This also explains CF's focus on upgrading larger amounts of ammonia to UAN -- a move very similar to UAN specialist CVR Partners' (NYS: UAN) . CF started upgrading an extra 200,000 tons per year of ammonia since last quarter. Both companies are investing heavily on UAN expansion, something that could change their fortunes.

Phosphate to pitch in
Phosphate, as expected, was the only nutrient that didn't do well for CF. High costs and low selling prices dented this division's margins. Peer Mosaic (NYS: MOS) , too, faced a similar situation in its last quarter.

But things might improve soon. Phosphate sales volumes were up for both companies, and demand seems to be on the way up. Mosaic is even expecting record shipments this year. More importantly, Mosaic is reportedly negotiating prices at which it will sell phosphate to India. This might prove to be the turning point for phosphate prices in the near future.

Lost out on gas
Ironically, the only area where CF seems to be losing is one where it should have gained from. Unlike other fertilizer makers, CF isn't really benefiting from the sharp dip in natural gas (key input) prices. That's because it had already hedged nearly two-thirds of its 2012 natural gas requirements by December last year.

Sadly, the company can also incur potential losses on its derivative contracts if natural gas prices do not recover, something that was evident in the first quarter in the form of mark-to-market loss (pre-tax) on natural gas derivatives amounting to $55.9 million. Comparatively, gross margins in peer PotashCorp's (NYS: POT) nitrogen division hit record highs in the first quarter thanks to low gas costs.

Nevertheless, low gas prices are good news for CF even if the gains are small.

The Foolish bottom line
I feel there's still room for further upside for CF. Things seem to be moving along well, with industry trends largely favoring CF. It is also sound financially, and even looks cheap on the valuation front when compared to peers.

I recommend adding CF to your personalized stock watchlist to keep tracking it as it moves further up. Click here to add it.

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At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services have recommended buying shares of PotashCorp. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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