Maintaining $85 FVE for CF Industries as Our Nitrogen Price Forecast Unchanged

After updating our CF Industries model to incorporate the company’s fourth-quarter earnings, we maintain our $85 per share fair value estimate. Our no-moat rating is also unchanged.

At current prices, we view CF shares as fairly valued with the stock trading in 3-star territory just above our fair value estimate. As such, we recommend investors wait for a pullback in shares before considering an entry point.

As a nitrogen producer pure-play, CF benefitted immensely from nitrogen prices reaching near all-time highs in 2022 due to the fertilizer supply shocks that came from the Russia-Ukraine conflict, due largely to a sharp reduction in Russia natural gas exports to Europe. As a result, soaring European natural gas prices in 2022, which is the marginal cost nitrogen producer feedstock, led to multiple nitrogen production facilities in Europe temporarily shutting down. CF generated record profits in 2022, with a 46% operating margin, reflecting peak cyclical profits.

However, as European natural gas prices have stabilized and fallen, the marginal cost of nitrogen production has also been reduced, and nitrogen prices have fallen. We forecast 2023 nitrogen (urea) prices of $450 per metric ton, well below the $700 average in 2022. For CF, lower prices will be partially offset by lower U.S. natural gas prices, which is CF’s input. As we forecast European natural gas prices will continue to fall over the next several years, our long-term urea price forecast of $350 per metric ton in 2023 real terms remains intact. Accordingly, for CF, this should lead to falling profits over the next few years.