BMO (TSX:BMO) Capital Markets has updated its outlook on CF Industries (NYSE: NYSE:CF), a leading fertilizer company, by increasing its price target from $95 to $100, while maintaining an Outperform rating on the stock.
The adjustment follows CF Industries' robust performance in the second quarter and the anticipated benefits from the 45Q tax credit for blue ammonia production.
The analyst at BMO Capital highlighted the significant factors influencing the revised price target, noting the incorporation of the 45Q credit into their financial model. The adjustment is projected to enhance the company's EBITDA by $50 million in the second half of 2025 and by $100 million in 2026. The new target is based on approximately 7 times the firm's estimated 2025 enterprise value to EBITDA ratio.
CF Industries' free cash flow (FCF) for 2025 is estimated to be in the range of $9.50 to $10 per share. The 45Q tax credit is expected to contribute approximately $0.30 to $0.60 per share in 2025 and 2026, respectively.
The analyst pointed out that despite poor sentiment in the agriculture sector, the fundamentals of nitrogen products are outperforming, supported by high gas prices in Europe that establish a price floor and the continued supply restrictions from China.
CF Industries reported robust earnings for the second quarter of 2024, with an adjusted EBITDA of over $750 million contributing to a total of $1.2 billion for the first half of the year. Net earnings were approximately $614 million for the first half, with $420 million attributed to the second quarter.
The company maintained a 99% utilization rate at its ammonia plants, and it's making progress on decarbonization projects, including carbon capture and sequestration initiatives.
CF Industries anticipates continued growth in demand for low-carbon ammonia and fertilizers, focusing on meeting customers' carbon intensity requirements. The company also sees an opportunity to export low-carbon ammonia to Europe. However, challenges in the European energy market could affect operations, including maintenance events and capital costs.
CF Industries is actively returning capital to shareholders, with the belief that the company's enterprise value is currently undervalued. The company is also planning flue gas capture and aims to achieve net-zero emissions by 2050.
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