No. of Recommendations: 1
Hi everyone,

A beat on both the top and bottom lines. Revenue was $1.71 billion vs. $1.67 billion expected, while EPS was $8.38 vs. $7.64 expected. I saw one news report saying that analysts had lowered their consensus expectations from $8.09 in the past 3 months. Regardless, CF Industries did better than the market expected.

All told, I'm quite pleased. Volumes were up for most products, as were average selling prices, with granular urea being the exception to that. But the hit from that wasn't too big as granular urea is a distant third in volume shipped of the various nitrogen chemicals it sells (less than 1/3 of the first 2 chemicals combined). The phosphate segment (ammonium phosphate) was down, however, which also weighed on results a bit.

I'm not sure why analysts had lowered their targets. There seemed to be a significant shift in product sold to this quarter thanks to a wet start to the year delaying a lot of crop planting.

Gross margins took a pretty big hit (10.5 percentage points) as the company saw a $95.6 MM swing from gain to loss on natural gas derivatives compared to last year. Trying to hedge against price movements helped them last year, but bit them on the rear this time. I wonder if any risk mitigated by these hedges is overcome by the risk of guessing wrong when setting up the hedges.

The low cost of natural gas continues to be a competitive advantage for the company as more expensive natural gas overseas hurts the production costs of competitors that export to the U.S. (Remember, natural gas is the single biggest input into making urea, ammonia, and their derivatives.)

The U.S. is producing a lot of corn, but CF Industries still a lot to be planted next year (92 MM acres, down a bit from 2013, but still historically high), which should mean good things for the fall. Growing world population, more high protein diets (animals fed on plant crops), and continued use of plants for fuel keep the long-term trends healthy for the company. Add in low natural gas prices, and the investing thesis remains intact.

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