UBS is downgrading CF Industries Holdings, Inc. (NYSE:CF) to Neutral from Buy primarily on valuation as UBS believes that the risk/reward is now more balanced given the run-up in the stock (up ~40% since the end of September vs 5% for the S&P 500 and 6% for the MOO ag index).
In UBS view, CF's outperformance reflects investors' enthusiasm for the recent bounce in nitrogen prices as well as the belief that CF could be a major beneficiary of any potential tax reforms as the majority of sales and inputs are domestic. Rolling forward to 2018 and reflecting higher nitrogen prices, UBS has raised its price target to $35 (from $28). However, given the prospect of new capacity coming online this year and the likelihood of nitrogen prices pulling back after the seasonal strong spring demand, UBS believes it's prudent to move to the sidelines for now.
NOLA urea price began 3Q <$180/st, increased to ~$220/st in 4Q, and is currently at ~$240/ton. Ammonia prices have also bounced back with Tampa prices up to $250/ton currently from $200/ton in October. Higher prices are due to strong seasonal demand and rising coal prices in China. The US is a net importer of nitrogen fertilizers (mostly in the form of urea) & imported Chinese coal based urea tends to set the marginal price.
UBS’s prior price target of $28 was based on dividend yield parity to LYB (~4.4%), since NTM EBITDA was too low to use as a basis. UBS is now rolling to a 2018 EBITDA basis and using a ~9.5x multiple for CF to derive the updated $35 PT. UBS notes that CF's 5 year EV/EBITDA range has been ~4x-9x & has recently increased up to ~12x. UBS believes a multiple at higher end of CF's historical range is supported by U.S. nat gas advantage for nitrogen fertilizers (as opposed to mineral fertilizers), & note global supply/demand improves in 2018 given limited new capacity.