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LSB Industries (NYSE:LXU) -9.1% and CF Industries (NYSE:CF) -2.2% in Wednesday's trading as UBS downgraded the fertilizer companies to Neutral from Buy, with respective $9 and $83 price targets, citing a shift down in the bank's outlook on ex-U.S. natural gas prices and therefore nitrogen prices.
UBS analysts led by Joshua Spector lowered their longer-term ex-U.S. gas forecast to ~$9/MMBtu from ~$11.50 previously, which negatively impacts the nitrogen cost curve and reduces our view of normalized earnings for LSB (LXU) to ~$130M from $140M prior. resulting in normalized free cash flow of $20M-30M/year, excluding growth investments, which could shift negative if debottlenecking or other growth projects are pursued.
On CF Industries (CF), UBS' reduced gas price forecast prompts a reduced view of normalized earnings to ~$2B from $2.3B prior, resulting in ~$1B in free cash flow before growth investments, implying a ~7% yield, which UBS views as fair; the bank also expects that as CF likely raises capital spending to capture growth in energy transition markets, the reduced cash flexibility could pressure the stock.
The bank's preferred picks among fertilizer producers are Corteva (CTVA) and Nutrien (NTR), which are near trough valuations and with catalysts through the year that could improve sentiment.