CF Leaves No Field Fallow

12/3/2012


  Recent Price
$208
  Dividend
$1.60
  Yield
0.8%
  P/E Ratio
8
  Shares (millions)
64
  52-Week Price Range
$227.99 - $128.03

Warren Buffett famously advised investors to be fearful when others are greedy and to be greedy only when others are fearful. That strategy has been the kernel of CF Industries' ($208; CF) success.

Unlike most other makers of fertilizer and agricultural chemicals, CF ramped up capital expenditures throughout the downturn. Those investments helped CF, the largest producer of nitrogen fertilizer in North America, post record sales and per-share profits in 2011. And the company is on pace to top both measures this year.

CF shares have returned 45% so far this year, easily outpacing the 19% median for its peer group. But the stock still looks ripe for growth. At less than eight times trailing earnings, CF trades 35% below its three-year average and at least 34% below its major peers. Earning a Value rank of 92 and maximum Overall score of 100, CF is a Focus List Buy and a Long-Term Buy.

Another big bet

CF's revenue, though up 6% in the nine months ended September, has declined in the past two quarters as higher prices only partly offset lower fertilizer volumes. But profit margins have steadily expanded in recent quarters, helped by unusually low prices for natural gas — a key ingredient for nitrogen fertilizer. Natural-gas prices are rising but remain historically low. Given the surge in production of North American shale gas, CF views the decline in natural-gas prices as a "sustainable cost advantage."

While concerns about the fiscal cliff have caused some U.S. companies to cut back on spending, CF continues its bold push. With many of its plants running near capacity, CF plans to spend $3.8 billion through 2016 to expand its U.S. nitrogen facilities. CF also agreed to spend close to $1 billion to take full control of the largest nitrogen-fertilizer plant in Canada. In September, the company announced a $3 billion stock-repurchase program, enough to reduce the share count by 23% at current prices.

Despite droughts that ravished fields across the Midwest this year, CF expects U.S. farmers to plant 97 million acres of corn in 2013, up slightly from the 96.4 million acres planted in 2012, which in turn was the most in 75 years. Crop insurance typically costs the federal government $7 billion a year, but is projected to soar to a record $15 billion in 2012. Should Congress scale back on the subsidy, farmers could turn more cautious.

Still, CF says it entered the December quarter with strong orders. Deere ($84; DE) said orders for farm machinery remained robust in the October quarter, a signal of farmer confidence. Moreover, CF seems confident it can raise prices for fertilizer, a cost that has historically gobbled up 19% of farmers' revenue but currently accounts for just 15% to 16%.

Although analyst estimates are rising, the consensus calls for per-share profits to fall 3% in 2013 and rise at annual rate of just 2% over the next five years. In our view, the long-term estimates don't fully reflect CF's expansion plans or massive stock buyback. An annual report for CF Industries Holdings can be obtained at 4 Parkway North, Suite 400, Deerfield, IL 60015; (847) 405-2400; www.cfindustries.com.

CF INDUSTRIES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '12
5.85
vs.
5.16
- 3%
227.99
-
190.10
8 - 7
Jun '12
8.71
vs.
6.87
- 4%
203.32
-
154.17
8 - 6
Mar '12
6.06
vs.
3.82
30%
195.48
-
149.58
9 - 7
Dec '11
7.13
vs.
2.78
39%
176.97
-
115.34
9 - 6
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
6.10
22.98
1.00
192.70
-
115.34
8 - 5
2010
3.97
7.67
0.40
138.74
-
57.56
18 - 8
2009
2.61
7.42
0.40
95.13
-
42.30
13 - 6
2008
3.92
12.15
0.40
172.99
-
37.71
14 - 2
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
87
92
99
92
91
69

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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