Recently, Piper Jaffray analyst Brett Wong hosted a meeting with management of CF Industries (CF, Financial). He boosted his price target to $357.00 post meeting and reiterated his Overweight rating. In his research report, he noted,
"Management continues to be very positive around the outlook for North America nitrogen fundamentals and the cash generation of the business despite the overall weak ag fundamentals. North America will continue to be a net importer, even after the slotted industry expansion projects come on-line in 2015/16, and domestic producers continue to benefit from low cost natural gas. We expect the global urea cost curve will continue to hold proving more resilient than investors feared. We are lifting our FY15 estimates above the Street and our FY16 estimates remain well above consensus. Our price target moves to $357 as we expect the valuation multiple will expand as new capacity comes online and free cash flow increases with management committed to buying back stock."
I believe investors should follow Piper Jaffray’s advice and invest in CF Industries. 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) for approximately $1.4 billion in cash.
Pipper Jaffray’s analyst is not alone in his view. CF is receiving positive commentary from both buy side and sell side analysts. 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 $1 billion stock buyback 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."
Other 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. The company appears to be a good Buy given favorable nitrogen nutrient fundamentals and good free cash flow prospects.
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.
