CF Should Hold Up Under Pressure

8/19/2013


  Recent Price
$190
  Dividend
$1.60
  Yield
0.8%
  P/E Ratio
7
  Shares (millions)
60
  Long-Term Debt as % of Capital
37%
  52-Week Price Range
$233.43 - $169.33

CF Industries ($190; CF) is one of just three stocks on our Buy List that have declined in 2013, posting a loss of 6%. Yet CF remains a compelling pick, in large part based on its Quadrix scores and valuation. We will keep the stock on a short leash, assessing its share-price action and whether management can continue to top modest expectations, as it did in the June quarter. CF, the largest U.S. producer of nitrogen fertilizer, is a Buy and a Long-Term Buy.

Pros and cons

CF's sales have declined in five straight quarters. Cash from operations totaled $2.12 billion over the past 12 months, down 4% year-over-year, and turned negative in the June quarter. Over the next 12 months, per-share profits are projected to slide 13%.

Gross profit margins shriveled by 10 percentage points in the June quarter, just the second decline in 11 quarters. Sagging profit margins reflect higher prices for natural gas, which accounts for about 70% of nitrogen costs. Nitrogen generates about 85% of CF's sales, with the rest coming from phosphate fertilizer. CF said natural-gas costs jumped 21% to $3.79 per million British thermal units (MMBtu) in the June quarter. However, natural-gas prices dipped sharply in July and August. The company has locked in 90% of its production needs from August to November at $3.67 per MMBtu.

CF expects global demand for nitrogen to advance 2% a year, driven by industrial growth. Agricultural customers generate 85% of CF's sales, with most of the rest coming from industrial firms. To meet demand, CF plans to spend $3.8 billion on U.S. expansion projects over the next few years.

Those plans have pressured CF shares, as have hurt by concerns CF could get squeezed as overseas competition lowers fertilizer prices, and that natural-gas costs could rise. However, management expects natural gas to remain below $5.00 per MMBtu in the next couple of years, low compared to global prices, giving CF a substantial advantage over foreign competitors. The U.S. imports about 38% of its nitrogen fertilizer, and CF could take market share as it expands capacity.

At less than seven times trailing earnings, CF shares trade near their lowest point since 2009 and 32% below the peer-group average. The stock earns a Quadrix Value score of 97 and scores of 93 for enterprise ratio and 91 for price/cash flow, two of the three most effective Quadrix factors in the past decade.

Management sees its own stock as a good value, repurchasing nearly 18% of outstanding shares in the past two years at an average price of $169 per share. But in recent weeks, investors have questioned whether the company should spend more on dividends, rather than buybacks or factories. Hedge-fund manager Daniel Loeb has lobbied for a higher distribution. CF, which yields 0.8% and pays out just 6% of its earnings, could beef up the dividend if it wished. Its three largest peers yield at least 2.3%.

The Overall score, currently 92, has consistently topped 90 in the past year. Both sector-specific scores also exceed 90. 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
Jun '13
8.53
vs.
8.71
-1%
197.38
-
170.53
7 - 6
Mar '13
6.03
vs.
6.06
-13%
233.43
-
189.74
8 - 7
Dec '12
7.27
vs.
7.13
-14%
226.50
-
191.90
8 - 7
Sep '12
5.85
vs.
5.83
-3%
227.99
-
190.10
8 - 7
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
6.10
27.92
1.60
227.99
-
149.58
8 - 5
2011
6.10
22.89
1.00
192.70
-
115.34
8 - 5
2010
3.97
8.62
0.40
138.74
-
57.56
16 - 7
2009
2.61
7.81
0.40
95.13
-
42.30
12 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
46
97
96
93
55
11

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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