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Aug. 4, 2016, 2:30 p.m. EDT · CORRECTED

Fertilizer stocks tank as low nitrogen prices batter earnings

CF Industries leads selloff as earnings fell short of expectations

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By Ciara Linnane, MarketWatch

An earlier version of this article incorrectly attributed a quote to the head of IR instead of the CEO. It has been corrected.

Caitlin Huston/MarketWatch

Stocks of fertilizer makers were sharply lower Thursday, led by CF Industries Holdings Inc. after earnings that were much weaker than expected.

The Deerfield, Ill.-based company is the latest to report a bruising quarter as the price of nitrogen remains under pressure from China’s growing exports of urea, which is replacing ammonium nitrate as a fertilizer, and oversupply in North America after capacity additions. Nitrogen is the most important nutrient for plant growth and the key ingredient in commercial fertilizer.

“The combination of excess nitrogen capacity with lower global energy costs coupled with devaluation of certain key currencies and assisted by low transoceanic freight have led to the dramatic fall in nitrogen product prices,” is how Tony Will, chief executive of the company, summed things up on the company’s earnings call.

CF Industries shares /zigman2/quotes/209482112/composite CF +3.03% fell 15%, putting them on track for their biggest one-day decline in eight years. The last time the stock fell that much was Dec 1, 2008, at the height of the financial crisis. The stock is at its lowest level since October 7, 2010. It has fallen 48% in the year so far, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.39% has gained about 6%.

Mosaic Co. shares /zigman2/quotes/203825795/composite MOS +1.27% were down 4%. Intrepid Potash Inc. /zigman2/quotes/200438270/composite IPI +7.58%  fell 3%, along with CVR Partners LP. /zigman2/quotes/208103676/composite UAN +4.82% Potash Corporation of Saskatchewan  was down 3%. The VanEck Vectors Agribusiness ETF /zigman2/quotes/206860533/composite MOO +1.16%  was down about 1%.

CF said late Wednesday that it had net income of $47 million, or 20 cents a share, in the quarter, down from $352 million, or $1.49 a share, in the year-earlier period. Adjusted per-share earnings came to 33 cents a share, well below the FactSet consensus of 67 cents.

Earnings were hurt by a $61 million realized loss on natural gas hedges and a $150 million merger termination payment to Dutch company OCI N.V. CF was planning to combine with OCI’s European, North American and global distribution businesses, but the two scrapped the deal after the U.S. Treasury changed rules on so-called tax inversion deals in April.

Sales fell to $1.13 billion from $1.31 billion, weighed down by lower average selling prices across all segments. The company said it expects abundant nitrogen supply to continue to pressure pricing through 2017. The company is suspending its share buyback program to preserve cash.

On a call with analysts, executives argued that CF has an advantage in its position as a low-cost nitrogen leader with the largest North American production and distribution system, making it one of the most profitable nitrogen producers in the world.

The company is expecting the oversupply issue to ease after 2018 with no new capacity expected to come online beyond 2017 and underlying demand growth intact. The company still enjoys gross margins that are greater than 30% and delivered first-half margins of 35%.

“We occupy a very advantaged position within the nitrogen industry,” CEO Will said on the call.

“Current industry conditions are at a level we believe i’s unsustainable over the medium-term. Pricing is below cash cost for a significant amount of total global production and industry profitability in many regions is too low to support normal maintenance and turnaround activity, let alone equity returns and certainly well below that required for investments in new capacity,” he said.

Cowen analysts said they are sticking with their underperform rating on CF stock and price target of $21.

Meanwhile, shares of fertilizer, seeds and nutrients producer Scotts Miracle-Gro Co /zigman2/quotes/200553749/composite SMG -3.14% rose after J.P. Morgan upgraded the stock to overweight from neutral.

Analysts said the company’s expansion into the hydroponics market through acquisitions will allow it to tap into growing marijuana demand.

“The company now has a growth option that we think an investor is able to capture for about the price of the traditional business,” they wrote in a note.

The stock was up 2.6%, while the S&P 500 was up 0.1%.

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Ciara Linnane is MarketWatch's investing- and corporate-news editor. She is based in New York.

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