Market Takes a Bite Out of CF for Weak Results

The market punished  CF Industries (CF) for falling short of second-quarter consensus estimates, but we had already expected weak results in 2016. If anything, CF mildly outperformed our already low expectations for the quarter. With our forecast largely intact, we’re maintaining our $28 fair value estimate, no-moat rating, and very high uncertainty rating.

Management signaled that low nitrogen prices are here to stay for the medium term, matching our prior expectations. The nitrogen market is currently plagued by lower coal input costs for marginal producers in China, increased global supply from completed projects, and elevated Chinese exports--all contributing to weaker prices. Higher-cost production is being curtailed in China, but more closures will need to happen for price pressure to abate. We don’t expect much of a price recovery in the medium term, as we expect the marginal cost of production to remain at lower levels as capacity expansions persist through 2017.