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CF Industries Holdings, Inc. (CF) Earnings Spoil Investors Again

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Fertilizer manufacturer and distributor CF Industries Holdings, Inc. (NYSE:CF) reported record earnings after the market closed yesterday. Actually, the company set new watermarks for sales, EBITDA, and EPS, too. Given the strong performance across the company’s business segments, investors would have a difficult time finding reasons to complain. However, with nutrient markets on a tear in recent years investors may be wondering: “How long can this ride last?”

CF Industries Holdings, Inc.Financials
CF Industries left 2012 behind by posting the following improvements in performance over the previous year:

4Q11 4Q12 2011 2012
Net Sales $1,718 million $1,481 million $6,098 million $6,104 million
Total Expenses $45.6 million $47.6 million $155.3 million $201 million
Net Earnings $502.2 million $355.3 million $1,761 million $1,923 million
Diluted EPS $6.66 $7.40 $21.98 $28.59

Source: CF Inudstries

The company continued to spoil investors by besting full-year 2011 EPS by 30% and completing a $500 million share repurchase program announced in 2011 ahead of schedule. Total capital expenditures tallied up to $523.5 million last year, which were easily absorbed by sales.

Earnings were favorably affected by a $74.6 million gain on natural gas prices, or $0.72 per share, and a $10.9 million gain in employee post-retirement benefits, or $0.10 per share. A previously terminated credit facility contributed a $15.2 million charge, or $0.15 per share.

Financials: outlook
An exceptionally strong balance sheet allowed the company to commit $7.7 billion to future growth and opportunities. Included in that figure is a new $3.0 billion share repurchase program through 2016 and a $3.8 billion cash pool set aside for expanding nitrogen production capacity. That is great news since nitrogen will be a strategic weapon for farmers heading into this growing season.

After a historic drought last summer the company expects the country’s decimated stocks of the big three crops – corn, soybeans, and wheat – to keep crop selling prices high. Farmers eager to dig out of a hole from the previous harvest should be encouraged to plant record amounts of crops in 2013, which will keep fertilizer prices comfortably high for CF Industries.

Phosphate, which the company sells globally, is not doing as well as nitrogen. Gross margin fell 54% in the fourth quarter compared to the year-ago period. While producers around the world have scaled back production, management at CF Industries fully expects the market to improve later this year. A strong soybean planting in South America this past fall and improving demand from India are expected to drive the phosphate recovery.

Investors will need to accept much higher capital expenditures, or capex, in 2013 as the company tackles its nitrogen expansion projects. The $523.5 million in capex for 2012 will soar to between $1.45 billion and $1.75 billion in 2013. Remember, management has informed investors of the scope of the projects well beforehand, so there should be no surprises. In the end, the greatly increased nitrogen capacity will be well worth it as long as prices remain favorable.

The nitrogen segment at CF Industries sold roughly the same amount of products in 2012 as in the prior year, but got a big boost in margins from favorable natural gas contracts.

2011 2012
Tons of Product Sold 13,002,000 12,969,000
Cost of Natural Gas $4.28 per million BTU $3.39 per million BTU
Gross Margin 51.1% 57.2%

Source: CF Industries

The company enjoyed average selling prices for its nitrogen products that closely mirrored those realized in 2011. In fact, the company produced 640,000 tons more nitrogen in 2011 than it did last year, meaning it reached for inventory more frequently during plant expansions.

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