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CF is it ready for a fall?

Or is it going to 400....?

How high will CF stock go before the Analists are right?

Jobless claims climb to 4-week high of 274,000

By Jeffry Bartash May 21, 2015 8:30 AM

Should you sell a stock going Higher?

Last hoorah for CF?

Peter Mantas, Logos-LP

Deep value, growth at reasonable price, long only, foreign companies

CF Industries Is Overvalued In This Current Bull Market?

May 21, 2015 9:09 AM ET  |  14 comments  |  About: CF Industries Holdings, Inc. (CF)

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)

Summary

• CF Industries has provided shareholders with incredible returns over the last decade.
• Despite substantial decreases in sales, the company's stock continues to rise.
• It is not an attractive investment at these levels given the widening spread between the stock and agricultural commodity prices.

CF Industries (NYSE: CF) has had quite a run: the stock has generated over 25% the last year and has increased its dividend by over 50% since 2014. It has been one of the best performing stocks over the last decade, providing investors with over 15x return on capital.
The company is the leading producer and distributor of nitrogen products (was a producer of phosphate fertilizer until it sold that division in 2014) and there is no question the company is a highly profitable entity. Over the last 10 years, the company has grown revenue from $1.9 billion to $4.7 billion and operating margins are near 50%. Aside from growth in demand for crop yields, the main cause for this has been the low cost of natural gas which is the most important input for CF. The fundamentals for natural gas does not seem to be changing drastically given its abundance in North America and current gas costs on the NYMEX exchange remain under $3.00/MMBtu which have been a large boost to the company's bottom line. Book value per share has skyrocketed from $13 to near $86 and free cash flow has remained strong trending upwards as of late.
However, I believe the company is trading at premium despite strong long term fundamentals for crop yield.
Figure 1 provides a chart comparing the correlation between the price of corn, wheat and CF Industries stock over from late 2009 to mid-2013. Here, an investor can observe some positive correlation with almost identical movements in certain periods, mirroring upward spikes and downward trends of the commodity. It is important to note that the healthy rise in corn and wheat prices in 2011 and 2012 were CF Industries best years in terms of revenue and operating income ($6bn in sales in 2011 and $6.1bn in sales in 2012). Clearly, there must be some impact of the underlying commodity (and farmer income) on CF Industries results since the commodity does provide some weight on the stock.

Figure 1

(click to enlarge)
Interestingly, Figure 2 shows an unusual breakout of the stock in mid-2013 leading to an increasing spread between the stock and the aforementioned commodities. It is clear that something must be happening that is outside the pure fundamentals of its earnings: sales since 2012 have declined by more than 27% and operating income has declined by 26%. This makes sense since both wheat and corn prices have declined drastically putting pressure on farming incomes. Of course, CF Industries also has a strong industrial market, but that steady growth has not been enough to propel overall growth over the last couple of years.

Figure 2

(click to enlarge)
I believe that the effects of the bull market on this historically cyclical name, share buybacks, increases in the dividend and the low cost of natural gas have been the main variables behind CF Industries recent rise rather than improving fundamentals in the market. Although I am bullish on farming income for the long term, CF Industries has no reason for an increase of nearly 60% since mid-2013: the company's revenues and EBIT have declined, free cash flow is negative in its most recent year and overall EPS is down from a high of $28.59 in 2012 to 27.08 in 2014 despite massive share buybacks reducing share count.
As seen in Figure 3, the DCF model also does not provide a good case to the company's valuation. There are obvious limitations to this model but no matter how one changes these assumptions, I do not see a world where CF Industries provides enough of a margin of safety for the long term. Moreover, wholesale nitrogen costs have been extremely volatile as of late on the international market, putting into question the medium term sustainability of nitrogen price stabilization which should directly impact CF Industries' results for next quarter and beyond.

Figure 3

I am in the camp that believes that value investing is in the eye of the beholder. One cannot look at earnings and PE ratios and determine a stock is undervalued - there must be premiums added and deducted to a company's stock based on the quality of those earnings. In other words, how consistent a stock is as a predictable cash flow generator with leading market share, innovation standards and acquisitions must be provided in the analysis of any stock purchase. CF Industries is not a consistent earner, is trading at a premium, and has been riding a bull market. This is not attractive for most investors no matter how one slices up the data. Let's be clear: this is not to detract from CF Industries as a company overall. The company has good long term prospects, very strong management, is a leading producer in nitrogen and, in fact, the company may rise over the short term as this bull market is extended. Does this mean CF Industries is a shorting opportunity or will decline tomorrow? I do not know the answer to that question, but there are too many headwinds in a maturing bull market that present investors with large opportunity costs over the medium term.

If you're writing fiction...

STEVE ALCORN is a Master writing teacher 

BTU-COAL- now or never....

Will Global warming join Y2K under the political rug? I thought so.  My research told me that a long time ago.

When people in the small towns are throwing parties on the money they make by flying to NYC , it is

a clue if you know what to look for.

But I'm just a guy on the blogosphere.

Coldest March day in Chicago in 80 years.

What's that got to do with coal...

If you think markets are being manipulated your right. If you disagree, your right.

And when the truth becomes popular.... the game will change

Just like tax loopholes...

so what we have seen is an example of why some companies pay dividends. Reward the insiders and

and fool the public.


FCX- cooper and gold... just wiped out most of their dividend. After fooling the public.

So when will it be time to buy back in.


MORAL...don't ask conventional wisdom, don't ask the public.