By Shmulik Karpf - January 8, 2013 | Tickers: AGU, CF, POT, RNF, TNH | 0 Comments
Shmulik is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.
There are many ways to invest in agriculture and farming: You can invest in farmland, in land machinery, or directly in commodities. But you can also invest in companies whose sole business is to provide ongoing maintenance to farmers and their crops, like fertilizing companies. My best choice in this sector is CF Industries (NYSE: CF)
A conservative investment
The company displays a fortress-like balance sheet. As of Sep. 2012, CF is sitting on cash and cash equivalents in the total of $2.2 billion. With a long-term debt of only $1.6 billion and a market cap of $12 billion, it is running an ultra-conservative balance sheet. In a sense, it is the Microsoft of the fertilizer industry.
The company displays a fortress-like balance sheet. As of Sep. 2012, CF is sitting on cash and cash equivalents in the total of $2.2 billion. With a long-term debt of only $1.6 billion and a market cap of $12 billion, it is running an ultra-conservative balance sheet. In a sense, it is the Microsoft of the fertilizer industry.
CF - superior to rivals
CF industries has some very respectable rivals. At a $13 billion market cap, it has some obvious benefits to scale, yet it is not the largest player out there. Agrium (NYSE: AGU) has a market cap of $15 billion, while the gigantic Potash (NYSE: POT) stands at $35 billion.
CF industries has some very respectable rivals. At a $13 billion market cap, it has some obvious benefits to scale, yet it is not the largest player out there. Agrium (NYSE: AGU) has a market cap of $15 billion, while the gigantic Potash (NYSE: POT) stands at $35 billion.
Among the smaller players in the industry, you can find Terra Nitrogen (NYSE: TNH) andRentech Nitrogen (NYSE: RNF). Let's take a look at the table below to see how CF compares to its various rivals.
| Trailing P/E | Price/Sales | Net Profit Margin | Payout Ratio | |
| CF | 7.5 | 2.1 | 29% | 6% |
| AGU | 12.3 | 0.93 | 8% | 9% |
| POT | 15.5 | 4.6 | 30% | 16% |
| TNH | 14 | 5.6 | 40% | 102% |
| RNF | 15.2 | 6.47 | 41% | 95% |
As you can see from the above table, CF is by far the cheapest stock, judging by its P/E multiple and net profit margin. In addition, it also presents a strong opportunity for imminent dividend hikes since its payout ratio stands at only 6%.
The catalysts
Every cheap investment needs a catalyst for a share price increase. Once this catalysts kicks in, the share price is more likely to reflect the true value of the company. There are two main catalysts that are likely to lead to a substantial share price increase.
Every cheap investment needs a catalyst for a share price increase. Once this catalysts kicks in, the share price is more likely to reflect the true value of the company. There are two main catalysts that are likely to lead to a substantial share price increase.
Catalyst #1: Share buyback program
CF is an aggressive buyer of its shares. It has already implemented a $1.5 billion share repurchase program, and it is authorized to buy back an additional $3 billion worth of its shares over the next few years. In fact, Forbes recently ranked the company as a top pick thanks to its strong buyback activity.
Let's crunch some numbers. Since the company currently has a share float of 62 million shares outstanding, buying $3 billion worth of shares at an average price of around $200 per share would reduce the share count by 15 million shares. That is a whopping 24% increase in EPS from share buybacks alone. Eventually, income is distributed over fewer shares, EPS rises, and the share price corresponds with a similar rise.
Catalyst #2: Business expansion
On Nov. 1, 2012, CF announced an intensive business expansion. According to the company, it will construct new ammonia and uria/UAN production units.
Today, CF is entirely U.S only. Its distribution channels and marketing take place almost only within the borders of the U.S. Boosted by cheap natural gas and this business expansion, the company is finally ready to increase its share in the global fertilizer market where it has almost zero presence and where the big players are either Chinese or Russians. The business potential is nothing short of enormous.
Potential hazards to the business
In business, anything can happen. Global demand for the company's products can suddenly come to a halt. A strong decline in the price of agricultural commodities could potentially force the company to cut prices of its products. Alternatively, the company might get itself into trouble with the building of its new plants such as unexpected overhead expenses. But the chances for all that are really not very high.
The look ahead
CF is very cheap by the numbers, it operates in a fast-growing market, and it is highly profitable. Based on the risk-reward ratio and counting in the aggressive share buyback program, I believe that CF is a terrific investment, and a must-have stock in your portfolio heading into 2013.
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