CF Industries Earnings: Lower Nitrogen Prices Weigh on Profits

CF Industries’ third-quarter results reflected lower nitrogen prices, where spot prices generally bottomed out near the beginning of the quarter, before slightly rising during the quarter. However, we had expected the lower results given our forecast for lower nitrogen prices. With our near- and long-term nitrogen price forecast unchanged, we maintain our $85 per share fair value estimate for CF Industries. Our no-moat rating is also unchanged.

CF shares were up slightly at the time of writing. The stock trades a little below our fair value estimate but in 3-star territory. Accordingly, we recommend investors wait for a pullback and for shares to offer a larger margin of safety before considering an entry point into the pure-play nitrogen producer.

With prices currently just above our long-term urea forecast of $350 per metric ton, we forecast prices will normalize. However, given our view U.S. natural gas prices to rise in 2024, we expect CF will see lower profits in 2024. However, should natural gas prices rise around the world, particularly Europe, where nitrogen producers represent the marginal cost of production, we see the potential for nitrogen prices to rise in 2024.

However, offsetting this favorable dynamic for CF’s realized nitrogen prices is potentially lower U.S. demand. Soybean prices are currently at a favorable level relative to corn prices. If this dynamic holds through the winter, we would expect more U.S. soybean acres and fewer corn versus 2022. Given that soybeans require far less nitrogen versus corn, a shift to soy acres could weigh on U.S. nitrogen demand in 2024.