1 Smart Pick for 2013
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The countdown begins. Well, almost. With hardly three weeks to go for a new year, it’s time to take stock of the year that was. Time to dig deep into companies I follow closely to see how they fared in the past 12 months. Did stocks I believe in keep their chin up in a turbulent year, or did they find the challenges too hot to handle?
Well, there’s one stock that weaved a success story in 2012, and which continues to look like a pretty exciting and safe bet for 2013. I’m talking about fertilizer giant CF Industries (NYSE: CF).
Record sales and record net profits -- it has been a fantastic year for CF so far. Bottom line, in particular, climbed 27% during the first nine months compared to the same period last year. For the trailing 12 months, CF’s gross margins stood at 52% and net margins at 28.6%. So the run up in CF’s stock prices seem justified – they returned solid 38% gains year-to-date. Comparatively, PotashCorp’s (NYSE: POT) stock is deep in the red, while Mosaic’s (NYSE: MOS) shares are nearing the year end on a flat note. Only Agrium (NYSE: AGU) gave CF company on its way up. Here’s a quick snapshot of share price returns year-to-date for CF and its peers.
So what worked for CF and Agrium that didn’t for the rest? A one-word answer would be nitrogen.
Because nitrogen is the most important nutrient for critical crops like corn and CF is the largest producer of the nutrient in North America, bumper crop plantations in spring 2012 pulled it off for CF during the first half of the year. Its nitrogen sales volumes improved 15% from the comparable period last year, getting nice support from firm fertilizer prices and mellow input costs (natural gas). Unlike PotashCorp and Mosaic, which had to pull the plug on potash and phosphates production throughout 2012 owing to weak demand from key markets like China and India, CF had a pretty smooth ride. So smooth and encouraging, that the company doubled its capital spending plans from $1 billion to $2 billion by the end of the second quarter.
Ready for the future
CF kept the ball of growth rolling this year through some big-scale project announcements including new urea and ammonia plants at its largest facility Donaldsonville, Louisiana, and new units at its Port Neal complex. Total cost for the investments amounts to $3.8 billion. Work has already begun, and the facilities should be up and running by mid-decade.
What I noted is how the projects will significantly expand capacity of urea ammonium nitrate – a nutrient that seems to have caught CF’s eye pretty recently. It’s been just a few quarters since CF embarked on plans to annually convert an additional 200,000 tons of ammonia to UAN, and the expansion plans say there’s more to come. Consequently, CF will become a stronger competitor to UAN specialist CVR Partners (NYSE: UAN). So profitable is UAN as a nutrient that CVR is all set to convert 100% of ammonia it produces to UAN next year onwards as its major expansion program wraps up.
CF will also add another feather to its cap as it steps into 2013 – it will become the boss of the largest nitrogen facility in Canada once it buys Viterra’s stake in Canadian Fertilizers Limited (CFL). Agrium is taking over Viterra’s other retail businesses. The deal has just won a long-pending regulatory approval, so it’s just a matter of months, or maybe even weeks, before CF bags CFL. Naturally, benefits of the deal should be visible next year.
Wind at its back
PotashCorp is downing shutters on two of its mines until February 2013 and Mosaic has already lowered volumes guidance for its next quarter. While the fate of these companies (and their stocks) hang largely on India or China, CF is safe on most fronts.
Estimates for U.S. 2013 spring plantations are already touching the roof – corn is pegged to cover 97 million acres, which would be a record. There’s reason behind such hopes -- crop prices are high, and farmers are flush with cash from crop insurances that were activated following the drought. So CF’s nitrogen products might just fly off shelves as spring 2013 approaches. Then there’s the added advantage in Canada to look forward to. As for natural gas costs, even if they inch up a bit, they’d still be low enough to boost CF’s gross margins. Anyway, projections point at flattish gas prices for years to come.
CF has also given shareholders a fresh $3 billion worth buyback program (to continue through December 2016) to dance with. Activist investor George Soros believes CF has a lot to offer, buying its shares this past quarter.
Don’t let its three-digit pricing turn you off. At a P/E of just 7.6 times, CF looks cheap. Especially when winds seem to be in favor. Click here to add CF Industries to your stock watchlist to follow it through 2013.
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Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!