CF Industries Ripe for Growth

9/5/2011


  Recent Price
$190
  Dividend
$1.60
  Yield
0.9%
  P/E Ratio
13
  Shares (millions)
72
  Long-Term Debt as % of Capital
23%
  52-Week Price Range
$192.70 - $90.65

CF Industries ($190; CF), founded in 1946 and taken public in August 2005, manufactures and distributes nitrogen and phosphate fertilizers.

A combination of strong demand for fertilizer and favorable cost trends have benefited CF. Steady expansion of operating profit margins has keyed four consecutive quarters of growth in free cash flow.

The stock has rallied 40% this year yet is attractively valued at less than 13 times trailing earnings — 26% below its peer group and 24% below its five-year average P/E ratio. Relative to the 2011 consensus profit estimate of $20.95, the shares look even more attractive, carrying a P/E of nine, versus the peer-group median of 16.

The stock earns maximum scores of 100 for Quadrix® Overall and both of our sector-specific scores, 12-Factor Sector and Reranked Overall. All six Quadrix category scores exceed 70. CF is a Buy and a Long-Term Buy.

Business breakdown

Operating the two largest nitrogen fertilizer facilities in North America, CF enjoys economies of scale. The company augmented its scale advantage with the $4.6 billion acquisition of Terra Industries in April 2010, enlarging CF’s revenue base by about 60%.

The nitrogen business (82% of revenue in the six months ended June) grew revenue 68% in the first half of 2011. Principal products include ammonia, urea, urea ammonium nitrate solution, and ammonium nitrate, all of which managed sales growth of at least 22% in the first half of the year. Gross profit margins expanded on higher fertilizer prices and lower natural-gas prices. Natural gas accounts for about 45% of CF’s total cost of sales for nitrogen fertilizers.

Revenue from CF’s phosphate segment (18%) rose 51% in the first six months of the year. Chief products are diammonium phosphate and monoammonium phosphate, fertilizers with high phosphorous content. Higher fertilizer prices offset increases in sulfur and ammonia costs.

CF sells to a fairly concentrated customer base of cooperatives and independent fertilizer distributors, with its three largest clients accounting for roughly 23% of revenue. Two of those customers are signed to supply contracts that do not expire until 2013. The company’s facilities and key markets are primarily located in the U.S. Midwest and Canada.

Conclusion

Fertilizer demand is cyclical, and the long-term trend in natural-gas prices is uncertain. But CF anticipates a tight global market for nitrogen will keep prices high in the second half of 2011. Next year, farmers are expected to increase the acreage devoted to growing corn, a fertilizer-intensive crop.

In August, CF backed up its optimism by quadrupling the quarterly dividend to $0.40 per share and approving the repurchase of up to $1.5 billion in stock by the end of 2013. CF also said it plans to spend $1 billion to $1.5 billion on capital projects in North America over the next four years. The company’s capital spending from 2007 to 2010 totaled $741 million. 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 '11
6.87
vs.
2.99
+ 38%
158.42
-
127.29
15 - 12
Mar '11
3.82
vs.
1.54
+ 134%
153.83
-
120.01
19 - 15
Dec '10
2.64
vs.
1.03
+ 144%
138.74
-
92.41
22 - 14
Sep '10
0.87
vs.
0.78
+ 113%
103.96
-
63.06
16 - 10
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
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 - 3
2007
2.76
6.57
0.08
118.88
-
25.70
18 - 4
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
100
99
74
97
84
98
98

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


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