CF Industries (CF) is the IBD Stock Of The Day as the producer of nitrogen-based fertilizer predicted the favorable pricing environment will last “at least into 2022, if not beyond.” CF stock cleared a buy point.
Late Wednesday, the Deerfield, Ill., based company posted Q1 EPS of 70 cents, more than double year-ago earnings and 13 cents ahead of estimates. Yet revenue undershot expectations, rising 8% to $1.05 billion.
The company said gross ammonia production in 2021 will be approximately 9.5 million-10 million tons. The expected decline in output vs. 2020 reflects plant outages from the forced February shutdowns due to natural gas availability issues, as well as planned maintenance.
CF’s earnings report noted that low inventory levels have “driven commodity crop near-term and futures prices to the highest prices in nearly a decade, supporting strong demand for nitrogen fertilizer to maximize yield.” Low inventories “will require more than one growing season to be replenished.”
CEO Tony Will noted that international natural gas prices, the key cost input, “have really blown out.” That gives an advantage to CF, with its access to low U.S. natural gas prices. CF paid $3.22 per million BTUs in Q1 vs. a $6.90 cost in the UK.
“To bid production into the marketplace in those regions (Eastern Europe and China) requires strong nitrogen pricing,” Will said. The favorable dynamics should hold “at least into 2022, if not beyond, so we’re really excited about it.”
Shares rose 2.6% to 51.37 on the stock market today, just above a 51.34 buy point from an 8-week cup base. CF stock also recently bounced off support at the 50-day line, another bullish sign.
The relative strength line, which tracks its performance vs. the S&P 500, is just below March’s 52-week high.
CF stock has a solid but not great 75 IBD Composite Rating, better than 75% of all stocks. IBD research shows that the biggest stock winners often have a 95 IBD Composite Rating at the start of their big runs.
Last October, CF Industries announced a green ammonia project at its Donaldsonville, La., complex. It will produce roughly 20,000 tons per year of green ammonia.
The “green” designation means renewable energy resources power the process. And the company will divide the hydrogen atoms from water molecules, rather than using natural gas as the feedstock.
Ammonia, which is three parts hydrogen and one part nitrogen, could serve as an alternative to hydrogen fuel due to its greater energy density, Morningstar analyst Seth Goldstein noted in an April 16 report, “Identifying the Real Winners Amid the Massive Hydrogen Hype.”
He thinks the potential use of nitrogen-based ammonia for alternative energy could supplement demand, a long-term positive for pricing.
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