Is CF Industries (CF) Set To Disappoint In Q2 Earnings?

CF Industries (NYSE:CF) will release its second-quarter 2016 results after the bell on Aug 3.

Last quarter, the fertilizer maker had delivered a negative earnings surprise of 21.57%. Profits tumbled roughly 88.7% in the quarter. Sales, however, increased year over year and beat expectations, backed by higher volumes. Lower pricing across most segments weighed on the top line in the first quarter.

Let’s see how things are shaping up for this announcement.

Factors to Consider

CF Industries continues to see pricing pressure in its nitrogen business. Urea prices have been under pressure due to higher supply from Chinese producers. Global capacity expansion continues to weigh on urea and other nitrogen fertilizer’s prices, mainly that of urea ammonium nitrate (“UAN”).

CF Industries also faces pressure from competitors domestically as well as internationally. Russia and Ukraine, being large producers and exporters of urea, have a greater leverage on the global urea price. In the last earnings call, the company also stated its expectation about nitrogen pricing remaining under pressure due to new capacity coming online globally.

Additionally, the termination of the deal to buy specific assets of Netherlands-based fertilizers and industrial chemicals producer, OCI N.V. represents a setback for the company. CF Industries, in Aug 2015, agreed to purchase the European, North American and global distribution assets of OCI N.V. worth $8 billion. However, an announcement to take actions to curb corporate tax inversions by the U.S. Department of Treasury reduced the structural synergies of the deal prompting its termination.

The merger of CF Industries and OCI assets would have resulted in a combined production capacity of around 12 million nitrogen-equivalent nutrient tons. The combined entity would have emerged as the world’s biggest publicly traded nitrogen company. The combination was also expected to deliver around $500 million (post-tax) in annual run-rate synergies through optimization of operations, capital and corporate structure

CF Industries’ balance sheet is also highly leveraged. The company had long-term debt of $5.5 billion at the end of the first quarter of 2016, up 21% year on year. Further indebtedness can also harm the liquidity position of the company.

Earnings Whispers

Our proven model does not conclusively show that CF Industries is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. This is not the case here, as you will see below:

Zacks ESP: Earnings ESP for CF Industries is currently pegged at -5.88%. This is because the Most Accurate Estimate is 64 cents while the Zacks Consensus Estimate is pegged at 68 cents.

Zacks Rank: CF Industries carries a Zacks Rank #5 (Strong Sell). We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks That Warrant a Look

Here are some companies in the basic materials sector you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

International Flavors & Fragrances Inc. (NYSE:IFF) has an Earnings ESP of +0.71% and a Zacks Rank #2 (Buy).

Ingevity Corporation (NYSE:NGVT) has an Earnings ESP of +2.04% and a Zacks Rank #3 (Hold).

Minerals Technologies Inc. (NYSE:MTX) has an Earnings ESP of +0.87% and a Zacks Rank #3.