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CF Industries

  • 17-05-2013 6:26pm
    #1
    Value Hunter
    Closed Accounts Posts: 337 ✭✭


    Hey if anyone is interested heres some research I have on CF industries

    Overview

    CF Industries is a fertilizer manufacturing and distribution company headquartered in Chicago. Largest Fertilizer manufacturer in North America and second largest worldwide. Natural gas is a major material in manufacturing and CF has benefited from record low natural gas prices which are the result of fracking. This will continue in the future and may further decrease as the use of fracking expands. Fertilizer is a crucial component in agriculture industry and should continue at steady levels of consumption. CF benefit from owning nearly all the stages in the product process, from manufacturing to distribution to retail. This gives then a very strong margin of over 30%. CF also have a near monopoly in North America due to foreign competitors being banned from importing into the U.S. Voted the best American company by Barrons magazine in 2012.

    Financials

    Current share price of $192 with annual EPS of $28.59 giving a P/E ratio of 6.5. Revenue of $6.10 billion and a market cap of $12 billion. Net income in 2012 was $1.85 billion while cash reserves total $2.2 billion, up from $0.8 billion in 2010. Long term debt at $1.6 billion and total assets at $10.16 billion.

    Dividend of $1.60 per share annually, up from $0.08 per share in 2005, a 2000% increase. Share price has risen from $15 in 2005 to $192 today, a 1280% increase. $1.5 billion share buyback program completed in 2012, 13% of shares outstanding repurchased. A further $3 billion program is taking place until 2016, purchasing 25% of the company at the present valuation.

    Growth

    International expansion seems to be planned by management although the market has not realised this. CF purchased 50% of KEYTRADE AG, which is a Switzerland based international fertilizer trader. This gives CF access to sell fertilizer to international markets which they were not previously capable of doing. CF has also procured international shipping services, which is a clear sign they plan on starting to export fertilizer. This gives them huge potential for growth which hasn’t been realised by the market. The $3.8 billion capacity expansion program further backs this up as their capacity is currently adequate for their current market. The program will increase capacity by roughly 30%, which in my view is destined for export. Canadian Fetilizers ltd has also being acquired by CF and there financial results will soon be included as part of CF’s, this will add a slight increase to CF’s performance. UK fertilizer company Growhouse is 50% owned by CF and these results are not included as part of CF’s financial results, a similar situation exists with KEYTRADE AG.


    Valuation

    63 million shares outstanding with a market value of $12 billion and annual net income of $1.85 billion. $3 billion dollar share buyback will decrease outstanding shares by 25% at current value, using a margin of safety count this as a 20% reduction to 50 million outstanding shares. Total assets are $10.16 billion while long term debt totals $1.6 billion.

    Establishing a fair valuation we would use an annual net income of $2 billion, implying an 8% increase over current levels, quite achievable over a long term investment. We would multiply this annual profit by 7 to give a total business value of $14 billion, while having a conservative P/E ratio of 7. The total assets of the business total $10.16 billion and this raises the companies value to $24.16 billion. Subtracting the companies debt reduced the companies value to a final figure of $22.56 billion.

    With the share buyback program removing 20% of the outstanding share float, the total share number will be 50 million shares. Dividing this into the valuation of $22.56 billion gives a share price of $451.20 per share, a 135% increase on the current valuation.


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