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CF Industries Holdings, Inc. CF is expected to benefit from healthy nitrogen fertilizer demand in major markets and lower natural gas costs. However, it is exposed to headwinds from lower nitrogen prices.
The company’s shares have gained 16.4% over a year compared with a 9.8% decline of its industry.
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Let’s find out why this Zacks Rank #3 (Hold) stock is worth retaining at the moment.
Strong Nitrogen Demand, Lower Gas Costs Aid CF
CF Industries is benefiting from rising global demand for nitrogen fertilizers, driven by significant agricultural demand. Industrial demand for nitrogen has also recovered from the pandemic-related disruptions.
The company expects global demand to remain strong in the near future due to recovering industrial demand and farmer economics. High levels of corn planted acres, low nitrogen channel inventories and favorable farm economics are expected to drive demand for nitrogen in North America. Demand for urea is also expected to remain strong in Brazil and India. Demand in India is expected to be driven by an uptick in domestic production on the back of higher operating rates and favorable weather conditions.
Lower natural gas prices will also act in the company’s favor. CF Industries witnessed a significant decline in natural gas costs in the first quarter of 2024. Average cost of natural gas fell to $3.19 per MMBtu in the quarter from $6.62 per MMBtu in the year-ago quarter. Lower natural gas costs led to a decline in the company's cost of sales. The benefits of reduced gas costs are expected to continue in the second quarter of 2024.
Moreover, CF remains committed to boosting shareholders’ value by leveraging strong cash flows. It generated net operating cash flows of $2.76 billion and a free cash flow of $1.8 billion in 2023. It repurchased around 7.9 million shares for $580 million during 2023. CF returned roughly $900 million to shareholders through dividends and share buybacks in 2023. In the first quarter of 2024, the company repurchased 4.3 million shares for $347 million. The current $3 billion share repurchase program had around $2.2 billion remaining at the end of the first quarter. The company, earlier this year, also announced a 25% increase in quarterly dividend to 50 cents per share.
Lower Nitrogen Prices a Concern
CF Industries faces headwinds from softer nitrogen prices. Global nitrogen prices have declined since the beginning of 2023. Higher global supply availability driven by higher global operating rates due to lower global energy costs has resulted in a decline in prices. Lower average selling prices weighed on CF's top line in the first quarter. Selling prices fell in the quarter as decreased global energy costs reduced the global market clearance price required to meet global demand. The weak pricing environment is expected to continue over the near term. Lower pricing is likely to continue weighing on CF’s sales and margins.