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Must-know: Chilton Investment Company's 1Q14 positions

Part 5
Must-know: Chilton Investment Company's 1Q14 positions (Part 5 of 7)

Why Chilton exits position in CF Industries

Chilton and CF Industries

Chilton Investment added new positions in Canadian Pacific Railway (CP), CBS Corp. (CBS), and Wyndham Worldwide Corp. (WYN). It sold positions in  CF Industries Holdings (CF), Norfolk Southern Corp. (NSC), and Tenet Healthcare (THC).

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Chilton disposed of a position in CF Industries Holdings (CF) which accounted for 0.56% of the firm’s 4Q13 portfolio.

CF Industries Holdings is one of the largest publicly traded nitrogen fertilizer producers. Its principal nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (or UAN), and ammonium nitrate (or AN). The company’s other nitrogen products include urea liquor, diesel exhaust fluid (or DEF), and aqua ammonia, which it sells primarily to its industrial customers. In March, CF completed the sale of its phosphate mining and manufacturing business, which is located in Florida, to the Mosaic Company (MOS) for approximately $1.4 billion in cash. Its operations are reported in two business segments—the nitrogen segment and the phosphate segment.

The company said in February that it’s evaluating options for optimizing its capital structure, and that converting existing operating facilities “into a master limited partnership structure does not look terribly compelling to other alternatives such as additional low cost debt.”

The fertilizer producer’s 4Q results in February saw a decline in profit due to the lower price of nitrogen-based fertilizers and other crop nutrients and higher natural gas costs. Revenue fell 6.5% to $1.33 billion.

CF Industries misses on revenue estimates in 1Q14

The world’s second-largest nitrogen fertilizer producer’s 1Q14 results beat on earnings, but missed on revenue. CF reported net earnings of $708.5 million in 1Q14 compared to net earnings of $406.5 million in 2013, an increase of $302 million, or 74%. However, the results included a $461 million after-tax gain on the sale of the phosphate business. Excluding this gain, earnings fell to $247.5 million, or $4.51 per diluted share. Net sales declined 15% to $1.13 billion. Nitrogen segment net sales in 1Q14 were $987.5 million, down 10% from $1.1 billion in the same period last year.

In the 1Q14, CF said it experienced lower net sales and net earnings compared to the prior year quarter due to continued weakness in the global nitrogen fertilizer markets evidenced by lower average selling prices and the impact of higher natural gas prices. The decline in nitrogen average selling prices was attributed to a combination of increased supply, due primarily to higher exports from China and customers being cautious in their inventory buying, particularly for urea and UAN, for the spring application season. Natural gas costs increased compared to the prior year quarter because of the impact of extremely cold winter weather conditions in North America. These factors in the nitrogen segment partially offset a modest increase in volume, primarily due to strong shipments of ammonia, CF said in its 10Q filing.

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CF could use proceeds from phosphate unit sale, debt raising to fund share repurchases

In its 4Q13 earnings release, CF said that it “expects after-tax proceeds of roughly $1 billion following the close of the sale of the phosphate business to the Mosaic Company in the first half of 2014. The company also intends to raise up to $1.5 billion of additional long-term debt in early 2014. These new borrowings, in addition to cash from operations and proceeds from the sale of the phosphate business, will fund the company’s capital expenditures, working capital, dividends, and additional share repurchases.”

CF Industries declared a $1-per-share dividend on its common stock, representing an annual yield of 1.7%. It has repurchased 3.2 million shares during 1Q14 at an average price of approximately $248 per share, as well as an additional 0.7 million shares subsequent to the quarter end through April 30 under the $3 billion program.

A March report on the Market Realist website noted that CF Industries’ shares could perform well due to share repurchases (buybacks) and asset expansions. For more background, please read Must-know analysis: How CF Industries can reach $350 a share.

CF’s capacity expansions could drive future growth

CF is constructing new ammonia and urea (or UAN) plants at its Donaldsonville, Louisiana, complex and new ammonia and urea plants at its Port Neal, Iowa, complex. In combination, these two new facilities will be able to produce 2.1 million tons of gross ammonia per year and upgraded products ranging from 2–2.7 million tons of granular urea per year and up to 1.8 million tons of UAN 32% solution per year. All of these new facilities are scheduled to be on-stream by 2016.

There are several companies and ETFs that generate a significant portion of their earnings from nitrogen fertilizers. These include CF Industries Inc. (CF). Potash Corp. (POT), Terra Nitrogen Company L.P. (TNH), CVR Partners L.P. (UAN), and Agrium Inc. (AGU). Some of these are also part of the Market Vectors Agribusiness ETF (MOO).

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