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5 Reasons This Stock Will Prove Critics Wrong

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: A previous version of this article erroneously referenced a substantial decline in CVR Partners's most recent distribution. While the distribution did decline, it was related to a one time plant turnaround and the company expects the distribution to grow in the future. The article has been adjusted accordingly. 

It’s a common investor psychology – a stock that’s craved and raved about suddenly appears expensive once it hits a 52-week high.  CF Industries (NYSE: CF) has fallen prey, and many around me want to book profits. Why, I ask? I feel CF is one of the best long-term stories you could come across. Yes, even at current prices.

The best among all

CF’s stock has returned 28% over the past one year. But the real CF story unfurled after May last year when the stock got hammered to under $160. Those who bought it then are sitting on neat profits of 49% right now. That also means CF has outperformed most peers, rewarding investors with more than they could have asked for. What’s behind the euphoria?

Well, if you consider CF’s numbers over the past 12 months, it deserves the accolades. Top line growth that’s among the best in the industry, and profit margins ahead of others sums it up. Take a look.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Revenue growth %</strong></td> <td><strong>Gross Profit Margin %</strong></td> <td><strong>Net Profit Margin %</strong></td> </tr> <tr> <td>CF Industries</td> <td>12.8</td> <td>59</td> <td>28.7</td> </tr> <tr> <td><strong>Mosaic</strong> <span><span class="ticker" data-id="208044">(NYSE: <a href="http://caps.fool.com/Ticker/MOS.aspx">MOS</a>)</span></span></td> <td>-10</td> <td>33.1</td> <td>18.3</td> </tr> <tr> <td><strong>PotashCorp</strong><span> <span class="ticker" data-id="205037">(NYSE: <a href="http://caps.fool.com/Ticker/POT.aspx">POT</a>)</span></span></td> <td>-5.9</td> <td>52.2</td> <td>28.7</td> </tr> <tr> <td><strong>Agrium</strong> <span><span class="ticker" data-id="206813">(NYSE: <a href="http://caps.fool.com/Ticker/AGU.aspx">AGU</a>)</span></span></td> <td>13.5</td> <td>29.8</td> <td>8.1</td> </tr> </tbody> </table>

All Trailing 12-Month figures

Only PotashCorp has given CF competition on margins, but its declining top line takes away the sheen -- blame its namesake nutrient. Mosaic’s revenue slumped the most (you’ll know a little later why), and so did its profits. Comparatively, Agrium investors were a happier lot, which shouldn’t surprise anyone who knows what nutrient the company primarily deals in. Yes, it’s nitrogen that’s weaving magic for CF and Agrium.

Nitrogen, and CF rule

A company that specializes in nitrogen cannot complain much, really. Demand for the nutrient can never go down the cliff simply because it is also the most critical nutrient for an essential crop like corn. In fact, USDA data proves how nitrogen is gradually edging out potash and phosphate. If nitrogen made up 37% of total fertilizers consumed in the U.S. in 1960, its share surged to 59% by 2010. The gap between nitrogen and the other two is widening, as evidenced by this graph from USDA.

<img src="/media/images/user_13296/usfertilizeruse_large.png" />

You can’t find a company better than CF to exploit the nitrogen boom as it is the largest nitrogen producer in North America. It could even grow exponentially as long as natural gas prices lie low. A key input for nitrogen fertilizer, natural gas could take CF’s margins to levels never seen before (59% gross margin is anyway spellbinding). 

I don’t see a reason why CF shouldn’t outrun peers in the long term. PotashCorp specializes in potash and phosphate, and is little about nitrogen; though even that little helps it maintain margins at decent levels (as you must have noticed in the table above). Mosaic has nothing to do with nitrogen, which explains its dismal performance. Agrium is 80% nitrogen, so you know why its top line and margins grew over the past 12 months. Agrium’s stock also zoomed past all last year to return a staggering 45%. Why better than CF? Good question. Agrium has just raised its next-quarter outlook. Having seeds and crop protection products in its portfolio adds weightage to its business; and there’s the tiff with a major shareholder that’s keeping Agrium’s stock on its toes, though that’s a different story altogether.

One could name Terra Nitrogen, CVR Partners (NYSE: UAN), and Rentech Nitrogen as potential candidates for investment as they all are pure-nitrogen players. Yet, none excite as much as CF does. Terra is CF’s subsidiary, so it makes sense to go for the parent. CVR and Rentech are too young to hold any major place in the field yet, especially the latter. This is also why I didn’t mention either in the tables above. CVR particularly walks soft grounds because it uses pet coke for input instead of natural gas, looks expensive at a P/E of 14, and has just slashed its dividend as a scheduled plant turnaround in October impacted cash available for distribution in the fourth quarter. However, the company expects a double digit increase in cash available for distribution in 2013.

A hidden gem

CF’s three-figure price, massive run-up in recent months, and fresh 52-week high might tempt one to hunker down on the stock, but there’s more than meets the eye. Believe it or not, the stock is still the most reasonable one out there.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>Trailing P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Price/CashFlow</strong></td> <td><strong>Dividend yield</strong></td> </tr> <tr> <td>CF Industries </td> <td>8.3</td> <td>7.8</td> <td>7.2</td> <td>0.7</td> </tr> <tr> <td>Mosaic</td> <td>14.7</td> <td>12</td> <td>11.8</td> <td>1.1</td> </tr> <tr> <td>PotashCorp</td> <td>16.3</td> <td>13.1</td> <td>11.9</td> <td>1.6</td> </tr> <tr> <td>Agrium</td> <td>12.4</td> <td>12.2</td> <td>8.6</td> <td>0.9</td> </tr> </tbody> </table>

Source: Morningstar

Clearly, CF remains a bargain basement stock. Only, those who love dividend checks have better options – CF pays out just 6% of its profits right now. For a company that boasts solid operating margins, generates nearly as much free cash flow as net income, and has reasonable level of debt (total debt-to-equity ratio of 29%), it’s minuscule, to say the least. But CF makes it up with some good buybacks. After wrapping up a $1.5 billion share repurchase program last year (by which time its stock was trading 34% above the average repurchase price), the company announced a fresh $3 billion buyback plan to continue through 2016. Clearly, management sees a lot of unlocked value in CF’s shares, you must take heed. George Soros already has, buying loads of CF shares recently.

Foolish takeaway

Given CF’s growth potential and attractive valuation, I am surprised that analysts actually see the company shrinking by 7.6% this year while growing by just 2.7% over the next five years. Mark Feb. 18 on your calendars if you want to know CF’s plans for 2013 and beyond. If U.S. heads for record spring planting this year again, there’s no chance CF will fail you. Remember, the company is also ready to spread wings in Canada this year.

Any smart investor will know why CF’s a dream stock to own, irrespective of what analysts say. Still don’t have CF Industries on your stock watchlist? Click here to add it now. Have something to add? I’d love to know. Shoot them in the Comments section below. 

Neha Chamaria has no position in any stocks mentioned. 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!

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