Looking at CF Industries Holdings’ stock price over the last three years.

  • The chart shows the performance of fertilizer and agricultural chemical manufacturer CF, over the last three years
  • Since the stock’s most recent trough in October of 2020, it has exploded higher, rising 108%
  • We have been bullish on food & energy for myriad reasons, as explained in our white paper, quick take, and in a piece about the remarkable contrary indicator flags flying from magazine covers

CF Holdings: One of the Best Agricultural Stocks[1]

Please click here to see why our proprietary ranking model likes the stock.  Below, find some simple reasons CF Industries might be one of the top agriculture stocks and fertilizer companies to invest in.  CF focuses on making anhydrous ammonia and other inputs critical to supplying food products to a rising global population. 

CF Absolute Performance over the Last Three Years

CF Industries: The Case for Investigation

The chart below shows the same chart as the one above.  The only difference?  The chart below shows CF Industries’ price performance relative to the S&P 500.  Despite the massive run since October 2020, it is still severely underperforming over the last three years.

CF Relative Performance vs SP500 over the Last Three Years

How badly has the stock underperformed?  The chart below shows that if the S&P500 just stayed flat, CF would have to rise 40% to merely catch up with the broad index!

CF Absolute Performance over the Last Three Years

The data below is our Single Company Tear Sheet for CF. For all numbers, higher is better. The basics:

  • Valuation Quintile 5: CF is relatively cheap on P/B and S/EV. The company also has a respectable 2% dividend yield.  FCF/EV is in the 79th percentile as the stock generates a solid 5.6% FCF/EV – a number that may be headed much higher on falling capex and a huge expansion in global natural gas spreads which could cause large earnings growth in our view.
  • Balance Sheet Quintile 3: CF has a middling score on balance sheet quality as they failed to use ample liquidity to pay shareholders via dividends and focused on pulling 2022 capex projects into 2021 – a situation we believe may reverse in the year ahead based on management’s discussion of Q2 results.
  • Earnings Quality 4: The stock has high-quality earnings with terrific scores on accruals and depreciation/CAPEX and generates solid operating margins. Overall, the company has average but respectable ROEs (14%) and ROAs (4%). Once again, management has pulled forward numerous maintenance and other capex programs in the interest of maximizing capacity in 2022.

CF’s cheap valuation, above-average earnings quality, a product that is critical to the global food supply, and possible leverage to soaring natural gas price spreads leads us to believe investors may be interested in doing further research on the stock despite it’s mediocre rank in our model.

CF Single Company Heat Map

Read on to see some notes from the firm’s shareholder presentation and find other resources on CF Industries.

Our stock charts seek to bring interesting companies to the attention of long-term investors like us.  One of the items we find incredibly interesting about CF is the potential to capitalize on our much-discussed thesis on energy and energy stocks while also benefitting from a massive ESG tailwind.  Due to the need for large amounts of natural gas to produce fertilizer, fertilizer stocks do not come to mind for most people working for a “green” future.  Yet CF’s fertilizer products simply are not optional.  They are essential to supplying the agricultural products and agricultural companies that feed the world.

Despite this, CF has engaged in a tremendous effort to go green.  Their UK facility has moved almost entirely to green energy.  Even more impressive is their commitment to a clean energy economy.  From pages 24 & 25 of their Second Quarter 10Q:

Our mission is to provide clean energy to feed and fuel the world sustainably. With our employees focused on safe and reliable operations, environmental stewardship, and disciplined capital and corporate management, we are on a path to decarbonize our ammonia production network – the world’s largest – to enable green and blue hydrogen and nitrogen products for energy, fertilizer, emissions abatement and other industrial activities. Our nine manufacturing complexes in the United States, Canada and the United Kingdom, an extensive storage, transportation and distribution network in North America, and logistics capabilities enabling a global reach underpin our strategy to leverage our unique capabilities to accelerate the world’s transition to clean energy. 

Our Commitment to a Clean Energy Economy

In October 2020, we announced that we are taking significant steps to support a global hydrogen and clean fuel economy, through the production of green and blue ammonia. Since ammonia is one of the most efficient ways to transport and store hydrogen and is also a fuel in its own right, we believe that the Company, as the world’s largest producer of ammonia with an unparalleled manufacturing and distribution network and deep technical expertise, is uniquely positioned to fulfill anticipated demand for hydrogen and ammonia from green and blue sources. Our approach will focus on green ammonia production, which refers to ammonia produced through a carbon-free process, and blue ammonia, which relates to ammonia produced by conventional processes but with CO2 removed through carbon capture and sequestration (CCS) and other certified carbon abatement projects. We announced an initial green ammonia project at our flagship Donaldsonville nitrogen complex to produce approximately 20,000 tons per year of green ammonia. Additionally, we are developing CCS and other carbon abatement projects across our production facilities that will enable us to produce blue ammonia.

In April 2021, we signed an engineering and procurement contract with thyssenkrupp to supply a 20 MW alkaline water electrolysis plant to produce green hydrogen at our Donaldsonville nitrogen complex. Construction and installation, which will be managed by us, is expected to begin in the second half of 2021 and to finish in 2023. The cost of the project is expected to fit within our annual capital expenditure budgets. We will integrate the green hydrogen generated by the electrolysis plant into existing ammonia synthesis loops to enable the production of approximately 20,000 tons per year of green ammonia. We believe that, when completed in 2023, the Donaldsonville green ammonia project will be the largest of its kind in North America.

KCR believes that CF’s exposure to secular tailwinds in energy and its potential to become a beneficiary of ESG means the share price may be undervalued.  Over the short term the stock will likely be volatile but management’s comments and fiscally conservative policies, discussed briefly below, leave us with a positive view of the firm’s future. 

Leveraging the spread in raw material prices between US and ROW:

CF is the low-cost leader compared with the competition in Europe and Asia. The spread between US and overseas input prices is an enormous tailwind for the company and is expected to persist well in 2023.  The tight demand/supply situation for fertilizer is expected to persist (driven by tight grain supplies resulting in robust demand for fertilizer from India and Brazil).  We have documented the tailwinds that drought and higher energy prices might imply for food prices and food stocks repeatedly, and CF may be a terrific way to play this theme.

This is helping to keep output prices elevated and margins very robust. The company estimates that every $25 increase in urea prices translates into $375 million of EBITDA. For context, the current price of urea is approximately $450 and the EBITDA in the most recent quarter was $596 million. So, the $25 increase in price would represent a 6% change from the current price, resulting in a 63% increase in EBITDA (assuming constant input costs).

As a sign of excellent stewardship, the company expects to use the cash flow windfall to pay down debt to under $3 billion. This will improve the health of its balance sheet and help it regain investment-grade status. The company also hopes to opportunistically buy back stock which, we believe, at current FCF yields of 5.6%, represent an excellent use of excess cash.

Summarily, the following make CF Industries an interesting candidate for research in our view:

  • Cost advantage driven by spread in input costs between the US and ROW which is expected to persist
  • Capital discipline focused on debt repayment and thoughtful capital expenditures
  • Tight demand/supply balance in the output markets providing scope for a rise in ASPs
  • Operating leverage that will benefit significantly from rising demand and ASPs
  • Double-digit free cash flow yields

Please see below for some interesting charts from CF Industries’ earnings presentation.

Quick Facts from CF Industries Q2 Earnings Presentation

Spread in Input Costs between US and ROW

Global Energy Price 2019 2021F

Secular growth in demand from India and Brazil

India Imports Good Monsoons and Farm Programs

As always, we encourage investors to do their own homework.  CF has a number of moving parts and may carry unusually high risks due to its exposure to commodity, and other macro variables that their own management is candidly admits cannot be predicted.[2]

You can find more information on CF on their terrific Investor Relations page, where you will find a Calendar of Events and Corporate Profile.

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[1] In KCR’s view

[2] Management discussion of Q2 results, they note that they use the energy strip as pricing is difficult to predict – this is a humility the KCR staff appreciates.  Since their Q2 presentation, the price of TTF gas has risen over 100% according to the CME – an outcome that may suggest significantly higher profits in the quarters ahead should spreads stay elevated.

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