Which of These 3 Stocks Should Seed Your Portfolio's Returns?

By Chad Henage - October 20, 2012 | Tickers: CF, DD, MOS | 0 Comments

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If there is one certainty beyond the old “death and taxes” line, it's that everyone needs to eat. Since populations are growing and there is no way to create more land, companies that make crops more productive will always see good demand. Whether the company is a fertilizer producer or creates hybrid seeds, if it helps farmers generate more food it's going to sell. Since you couldn't ask for a more stable business, I wanted to find a company that might be a good play on the ever expanding need to feed. I ran a screen on Fool.com CAPS Screener looking for companies related to fertilizer and food production. However, I wanted well established companies that showed strong organic (pardon the pun) growth as well. There were three companies that this screen returned as potential contenders, but I want to know which one is the best value today. 

The three companies the screen returned were: CF Industries Holdings (NYSE: CF), E.I. Du Pont de Nemours & Company (NYSE: DD), and Mosaic Co. (NYSE: MOS). Each of these companies is a player in the food production business in a different way. CF Industries produces nitrogen and phosphate fertilizer products. DuPont makes hybrid corn and soybean seeds, as well as herbicides, as well as many other products. Mosaic is a participant in producing phosphate and potash crop nutrients. Whether you want a better yielding seed or nutrients to feed the seed, one of these companies is likely to benefit. To get an idea of how the market values each, let's first look at each company's projected earnings and valuation:

You can see there is a pretty wide split in opinion about each company, but at least on a PEG basis, CF Industries looks like the best bet. (CF Industries – 3, DuPont – 1, Mosaic – 2)

It's one thing to know what analysts expect in the future, but what have these companies done in the past. Honestly, I feel much more comfortable believing a company will grow in the future if I know they have been able to grow in the past. Look at what each company has done in the last three years:

(Calculations from Yahoo! Finance cash flow statements for each company over the last three years. Percentages represent total growth not annual growth.) 

This one is a landslide win for CF Industries. The company has grown both its net income and operating cash flow faster than its competition. Mosaic shows the next best consistency, and DuPont shows a big disconnect between net income growth and operating cash flow growth. (CF Industries – 3, DuPont – 1, Mosaic – 2)

While earnings and operating cash flow are one thing, free cash flow determines what a company can return to shareholders. To compare different sized companies, I use free cash flow per $1 of sales to get an apples-to-apples comparison. By this measure, CF Industries is the clear leader with $0.30 of free cash flow per $1 of sales. In second place is Mosaic, just narrowly beating out DuPont with $0.10 of free cash flow versus $0.09 of free cash flow respectively. (CF Industries – 3, DuPont – 1, Mosaic – 2)

Last, let's look at each company's dividend yield and payout to see which one offers the best current income. This one isn't even close, with DuPont offering a nearly 3.5% yield, and Mosaic coming in second at about 1.8%. Though CF Industries and Mosaic both have very low payout ratios at about 11% each, unless they raise their dividends significantly, they can't match the current income DuPont offers. (CF Industries – 1, DuPont – 3, Mosaic – 2)

The totals are CF Industries – 10, DuPont – 6, and Mosaic – 8. Considering that CF Industries had the most reasonable stock price, the best growth in net income and operating cash flow, and best free cash flow generation, this win shouldn't be a surprise. While the company's yield of 0.74% isn't much to speak of, it appears the company can expand this payout significantly since they are only using 11.7% of their free cash flow on the dividend. For investors looking to seed their portfolio with a good stock, CF Industries seems like a logical place to start.

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