Tuesday, October 28, 2008

CF Industries (CF) - Another Company Who Could Take Itself Private in a Few Years

CF Industries (CF) is yet another fertilizer company whose valuation simply makes little sense. It reported stellar earnings last night and is up 12% early this AM. That sounds exciting, except when you realize that takes it all the way back to Friday's pricing... which is the 2nd lowest it has been in a year.

The company has a $2.5 Billion market cap and $1.15 Billion of pure cash on the balance sheet with another $190 million in investments. So effectively the business is being valued at $1.2 Billion; or effectively $22-23 per share. A business on target to earn $16+ in EPS this year. So the base business is being priced at 1.5x earnings. Again, if instead of earning $20 next year as analysts expect and everything in the world goes wrong and earnings FALL by 50% next year, then we're pricing it at 3x 2009 earnings. This is how absurd valuations have become due to fear, hedge fund liquidations and the "all commodities are equal" thinking.

Now CF Industries deals mostly in nitrogen with a phosphates business. Nitrogen has been the weakest in pricing of the three nutrients of fertilizer, and of course the market looks forward. But what matters is not end price but MARGIN - the input for nitrogen is natural gas and that happens to be a commodity as well - that has been falling far greater than nitrogen prices. So the margin is not falling off a cliff. The bear case would have to be for 2009 that natural gas prices (input) prices rise while nitrogen prices fall (output) hence cramping margins. But that would be if anything traded on fundamentals anymore.

On the bright side, we are focusing on companies with cash flows, and I still think this is an excellent company to own once the market returns to any semblence of sense. As of last night they have issued a share buyback of "up to" $500M (again I do not like when company's announce buybacks without firm timelines as most do), and a very modest dividend of 10 cents a quarter. This is what you can do when you have massive cash flow as the fertilizer companies have. If they do the full buyback that is 20% of the company's valuation. And they STILL would have another $600M+ of pure cash left over to do another. And they are cash flow positive each quarter generating even more cash for the future; which is why as I've been writing for these fertilizer companies - if the market refuses to give them sensible valuations they literally can take themselves private within 3-4 years if they wish by simply snapping up all their shares with cash flow. But as we've said for nearly 5 months now, to this market oil = gold = fertilizer = natural gas = coal = copper = steel = it's all the same to the market. The differences between one subsector to another means nothing to the market.
  • CF Industries Holdings, Inc. (NYSE: CF - News) today announced that its Board of Directors has authorized the repurchase of up to $500 million of the companys common stock.
  • Our strong balance sheet is a result of our excellent financial performance over the last several years and our disciplined approach to deploying capital. While we continue to make progress on a number of long-term growth initiatives, investing up to $500 million in CF Industries common stock reinforces our commitment to careful stewardship of our shareholders capital, explained Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc.
  • The underlying fundamentals of our business today suggest that the companys investment in its common stock should provide an attractive rate of return for our continuing shareholders, compared to some other near-term investing opportunities the company is considering, Wilson added.
  • CF Industries Holdings Inc. on Monday said its board declared a quarterly dividend of 10 cents. The fertilizer manufacturer said the dividend is payable Dec. 1 to shareholders of record on Nov. 14.

The full report is here but I won't bother going into a full analysis because no one looks at fundamentals anymore. Essentially they did $3.70 of EPS net of mark to market hedging on their natural gas hedging.

  • At September 30, 2008, the companys cash, cash equivalents, and short-term investments totaled approximately $1.15 billion. In addition, CF Industries held investments in auction rate securities at September 30, 2008 that were valued at $190.2 million, resulting in total cash and investments of more than $1.34 billion. This compares to total investments in cash, cash equivalents, short-term investments, and auction rate securities at September 30, 2007, of $730.4 million.

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