Deze schrijver op Seeking Alfa houd een pleidooi voor CF
The information in Table 3 shows that CF Industries is undervalued. They have the lowest PE and a low EV/EBITDA. As a side note this makes them a potential takeover target and the stock price would certainly rise if an offer was made. It is unlikely that any of the other companies mentioned in Table 3 would undertake an offer. Agrium, before they became Nutrien, made a hostile offer to buy CF Industries in 2009 but were rebuffed. Also, there were negotiations in 2014 between CF and YARA to merge as equals, but CF dropped out of the discussions due to differences in corporate philosophy (Yara is 50% owned by the Norwegian government). I suspect that valuation was also an issue since CF is the more efficient producer.
The other thing to note is CF’s management efficiency. This is reflected in their industry high operating margins but also note employee production efficiency: almost 6,000 tonnes of fertilizer production per employee versus less than 2,000 tonnes per employee for any of the other companies. This is not really a fair comparison for Nutrien which has a large network of company owned dealers. The lower employee efficiency of Nutrien is offset by their ability to get retail pricing for their fertilizer.
With regard to dividend yield, CF, Yara and Nutrien are very similar but CF is the only one of the three with a sustainable payout ratio. In any case, a DY of >3% is very acceptable in the current environment.
Investment Case for CF
Figure 2 shows the recent stock price chart for CF Industries. It is still slightly below its 2020 high pre Covid indicating that it has not recovered completely.
Figure 2. CF stock price. 3 year chart. Dec 18, 2020. Source: Stockcharts.com customised by author.
The depressed CF stock price, together with its low EV/EBITDA, its manageable debt and exceptional profitability makes CF undervalued. There may be stock price volatility due to the commodity nature of the natural gas and nitrogen fertilizer markets, but overall CF is well positioned to remain competitive and handle fluctuations. The main issue going forward is whether CF can handle the trend to green ammonia production. Some ammonia producers, including CF Industries, are introducing carbon sequestering steps in the production process in order to reduce carbon dioxide emissions. As well, they are introducing electrolysis plant to their system – the first one will be at their Donaldsonville plant. In a recent press release (CF Industries Announces Commitment to Clean Energy Economy) they outlined their green ammonia plans. They have also started promoting the idea that they are a hydrogen producer as well as a nitrogen producer. Ammonia has 3 hydrogen atoms for every nitrogen atom and these hydrogen atoms can be removed and the pure hydrogen used as a “green” source of energy. Ammonia is a very efficient form of hydrogen transportation and CF obviously feels that this will be a significant non-fertilizer market opportunity in the future. The future is yet to be written but there is no reason to think that CF will not be able to effectively transition to green ammonia production. The transition away from natural gas as a feedstock will take many years due to the economic and logistical challenges of converting to electrolytic production of ammonia. Given the increasing demand for nitrogen fertilizer it is doubtful that government will push environmental regulation changes faster than the agriculture industry can handle.
As mentioned previously, the nitrogen fertilizer business is mostly a commodity business. CF produces the same nitrogen fertilizer products as other companies and they use the same feedstocks in their processes. CF’s main advantage is location since they enjoy some of the lowest natural gas prices in the world. But the prices of inputs and products are set on world markets and like everyone else in the industry they are price takers – not price setters. There is no doubt that natural gas and ammonia prices have a large effect on CF stock price. It is possible that there will be downward pressure on ammonia prices as new global production capacity is coming online. There are new plants under construction in China and in Saudi Arabia. The Saudi plant will be the largest electrolysis ammonia production plant in the world. It is green, and it will probably be subsidized by the Saudi government in terms of electricity costs. Overall though, demand for nitrogen fertilizer will be strong and conditions of excess supply due to new plants will be transitory.
Again, CF’s relatively low EV/EBITDA of 7 puts them in takeover range. I doubt whether the Chinese or Russians would be welcome but perhaps a large US private fertilizer company such as Koch Industries would be interested in buying CF. Koch Fertilizer is currently about half the size of CF Industries, but their parent Koch Industries certainly has the resources to buy CF if they wanted to. If so, it would be good for CF stock price. All things being equal, I expect a target price of $50 for CF in the next year. The average analyst estimate is $37.68 which is basically in line with the current price. The top analyst estimate is $46. According to Yahoo Finance, CF is undervalued with about 30% upside. In that sense, my target of $50 is reasonable. Together with the >3% DY this makes them an attractive investment now. If interested investors are concerned about another Covid related drop in the market, then wait until then and put CF on the watch list in the meantime.