Morningstar | Raising Our CF Industries FVE to $48 on Higher Near-Term Nitrogen Prices After Solid 3Q Results
CF Industries reported solid third-quarter results. EBITDA more than doubled year over year to $308 million on higher nitrogen prices, partially offset by lower sales volumes. We're raising our fair value estimate to $48 per share from $45 as our increased near-term nitrogen price forecast is only slightly offset by higher input costs for no-moat CF.We've updated our 2019 nitrogen price forecast to reflect our higher European natural gas price forecast. European nitrogen producers, who use producer the fertilizers from natural-gas-based inputs, set the marginal cost of production that informs our price forecast. Due to higher natural gas prices, we've raised our 2019 urea nitrogen fertilizer price to $260 per metric ton from $245. However, as we forecast European natural gas prices will fall roughly 8% from $7.61 per mmBtu in 2019 to $7.01 by 2022, we maintain our long-term urea nitrogen price forecast of $240 per metric ton in 2018 real terms.
Although CF should benefit from higher prices, the company's unit costs will rise in the near term from slightly higher U.S. natural gas prices. Regardless, our long-term U.S. natural gas price forecast of $3 per mmBtu is unchanged. As such, we continue to forecast that CF will generate operating margins over 30% in a midcycle environment. This sits below the 46% average from 2011-13, but well above the 5.5% generated in 2017.
CF should also grow profits from higher volumes in 2019. The company will not have as many turnarounds, which have kept year-to-date sales volumes slightly below those of 2017. Further, volumes should be supported by higher planted corn acres in the U.S. Some farmers will plant corn rather than soybeans due to lower U.S. soybean prices as a result of Chinese tariffs. Unlike most crops, soybeans do not require much nitrogen fertilizer, as the crop can obtain nitrogen naturally from bacteria. As such, a shift in planting between corn and soybeans will affect nitrogen demand.
CF Industries Holdings is a global fertilizer and chemical company. The company's principal nitrogen fertilizer products are anhydrous ammonia, granular urea, urea ammonium nitrate solution and ammonium nitrate. The company's other nitrogen products include diesel exhaust fluid, urea liquor, nitric acid and aqua ammonia, which are sold primarily to its industrial customers, and compound fertilizer products, which are solid granular fertilizer products for which the nutrient content is a combination of nitrogen, phosphorus, and potassium. The company serves its customers in North America through its production, storage, transportation and distribution network.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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