CF Industries’ profitability
CF Industries’ (CF) 3Q16 financial performance is a setback for investors. The company is the largest nitrogen fertilizer producer in the US. According to CF Industries, the company will import 30% of its 2017 nitrogen requirements. Falling fertilizer prices impact the company’s bottom line.
Overall, the gross margins for CF Industries’ combined segment fell from 17.8% in 3Q15 to 29 basis points in 3Q16. Similarly, the adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) fell from 37.9% in 3Q15 to 12.2% in 3Q16. The net adjusted earnings margins fell from 13.7% to 4.4%. Without adjustments, the EBITDA and net earnings are negative.
The adjustments include adding back loss on natural gas derivatives, expansion project expenses, Donaldsonville ammonia costs, gain on foreign currency transactions, income tax adjustments related to the termination of the OCI agreement, and debt-related fees.
Since most of these are one-time costs, the company still appears to be profitable. However, considering that the gross margins are thin, investors must tread with caution due to CF Industries’ 3Q16 earnings.
CF Industries’ profitability—like of PotashCorp (POT), Mosaic (MOS), CVR Partners (UAN), and other players in the agricultural fertilizer industry (MOO)—depends on how fertilizer and raw material prices perform. In the final part of this series, we’ll take look at this concept.