Jean-Marie Eveillard (Trades, Portfolio) is a value-oriented investor. His approach to asset management is defined by the conviction that absolute long-term performance is the best way to preserve capital rather than attempting to compete against the short-term movements of the major indices and rigorous application of bottom-up fundamental analysis intended to reduce risk. His strategy incorporates on-site research by actively visiting companies and talking to managers to gain rounded, firsthand knowledge of investment prospects. Eveillard buys securities whose intrinsic value and long-term potential outweighs market risk.
Last quarter, Eveillard initiated a new position in CF Industries (CF, Financial) buying 413,865 shares of the company. The new holding has a 0.28% portfolio weighting. CF Industries is one of the largest manufacturers and distributors of nitrogen fertilizer and other nitrogen products in the world. The company's principal customers are cooperatives, independent fertilizer distributors and industrial users. CF Industries' principal nitrogen fertilizer products are ammonia, granular urea and urea ammonium nitrate solution (UAN). Its other nitrogen products include ammonium nitrate (AN), diesel exhaust fluid (DEF), urea liquor and aqua ammonia, which are sold primarily to its industrial customers.
The company's core market and distribution facilities are concentrated in the midwestern United States and other major agricultural areas of the United States and Canada. CF also exports nitrogen fertilizer products, primarily from the Donaldsonville, Louisiana manufacturing facility.
Prior to March 17, 2014, the company also manufactured and distributed phosphate fertilizer products. Its principal phosphate products were diammonium phosphate (DAP) and monoammonium phosphate (MAP). On March 17, 2014, the company completed the sale of its phosphate mining and manufacturing business, which was located in Florida, to The Mosaic Company (MOS, Financial) for approximately $1.4 billion in cash.
CF is receiving positive commentary from both buy side and sell side analysts. The company is the largest holding of Passport Capital. In his latest investor letter, Passport Capital's Chief Investment Officer John Burbank (Trades, Portfolio) explained his investment thesis on CF Industries. Below is the excerpt from his investor letter:
"CF manufactures and distributes nitrogen fertilizer products primarily in North America and had a $13.6 billion market capitalization at quarter end. The company benefits from cheap U.S. natural gas prices, relative to competitors using expensive gas in Europe and coal in China. Additionally, CF recently appointed a new CEO who appears to be quite interested in delivering value to shareholders. We believe the company will follow through announced plans to return capital to investors via share repurchases and increasing dividends. Since the end of 2011, CF has reduced share count by approximately 30%. Currently, the company has authorized a one-billion dollar stock buy-back program, which may be expanded in size with a potential new debt offering. Additionally, the dividend has increased from $0.40 per year in early 2011 to an annualized amount of $6.00 in the third quarter of 2014. This is an important secular change in corporate governance. We expect even more capital returns to shareholders as they expand their production capacity by 25% due on-line in early 2016.
Nitrogen fertilizer prices remain in the middle of their long-term average. Currently, multiple production outages at competitors in other countries have kept nitrogen prices at mid-cycle levels. These outages are mostly structural in nature due to declining natural gas reserves, politics or war. We believe this should be accretive to EPS going forward.
We also believe CF is going to consider introducing MLP structures, which could have the effect of enabling collective corporate assets to trade at much higher valuations."
Sell-side analysts are equally positive on the company. Out of 22 analysts covering the company, 14 have buy ratings, 7 have hold ratings and one has a sell rating. Earlier this year Brett Wong of Piper Jaffray upgraded the shares to Overweight, citing favorable nitrogen nutrient fundamentals in 2015. He was also positive on the company's free cash flow prospects as its capital expenditure is set to decline significantly by 2016.
CF Industries is trading at a PE of 13.68. It has a forward annual dividend yield of 1.90%. Over the last year, the company has repurchased ~14% of its outstanding shares. The company appears to be a good buy given its low valuations, good history of capital return through buybacks and dividends, and solid nitrogen fundamentals.
