Nitrogen Sparks Growth at CF Industries

01/28/2014 8:00 am EST


Charles Mizrahi

Editor, Insider Alert

For value investors, we continue to like the industry environment for nitrogen and phosphate fertilizer products, suggests Charles Mizrahi, editor of Hidden Values Alert.

CF Industries, Inc. (CF) is one of the largest manufacturers and distributors of nitrogen and phosphate fertilizer products in the world.

Global nitrogen prices have been under pressure as a result of increased exports, in large part, from China. Foreign competition is a short-term concern resulting in weaker earnings.

But management remains optimistic about the company's long-term prospects (given the cyclical nature of the industry). Ultimately, increased demand from a growing population, will result in strong earnings going forward.

CF's distribution network gives the company a competitive edge over domestic producers. Its efficient shipping network is well-positioned to move its nutrients at low costs.

The company's relationship with customers will be a tough task to replicate by foreign exporters. It also serves as a barrier to entry to potential competitors.

In a major transaction, CF Industries agreed to sell its phosphate division to Mosaic for $1.6 billion. This allows the company to focus on its core nitrogen business and use the additional cash for its expansion projects.

As part of the deal, CF agreed to supply Mosaic with 600-800 thousand tonnes of ammonia a year, which helps stabilize demand for the nutrient.

CF's free cash flow has more than quadrupled since 2009 (from about $450 million to $1.8 billion this past year).

The company also has more than $3.2 billion in cash and investments on its balance sheet, with no short-term debt. Its ability to print money allows management to engage in shareholder-friendly policies.

Since 2011, CF has allocated $2.8 billion to its stock repurchase program, reducing shares outstanding by about 12%. The company has an additional $1.7 billion remaining on its authorized buyback program.

Management recognizes the company is undervalued and is committed to continued buybacks until the market prices its stock correctly. It also distributes a $4 quarterly dividend, providing a 1.7% yield.

The company also reinvests its profits to generate internal growth. CAPEX, over the past eight quarters, has exceeded $1.2 billion. Its expansion projects allow CF to increase nitrogen production at its facilities by around 40%, since 2011.

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