The Best Investment in Fertilizers?
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The crop yields have been affected severely, all due to the US drought. The US is facing its worst drought since 1956 and the agricultural produce has been hit hard. The shortage in agricultural production has pushed up the prices of crops significantly. Due to the spoiled produce, farmers will be looking to plant corn and soybean again next year, and will be requiring fertilizers and seeds along with seed protection nutrients. The play here is to select and invest in a fertilizer company, which will have its order book filled by next year.
CF Industries (NYSE: CF) is one of the largest manufacturers and marketers of nitrogen and phosphate fertilizers in the world. The Illinois based company, secured 82% of its sales from nitrogen fertilizers, the rest came from the phosphate fertilizers business. The company being one of the largest players in the industry is likely to benefit from the increased demand of fertilizers, expected next year.
The Aggressive Approach
The company acquired Terra Nitrogen in 2010, which put CF Industries on a global scale in nitrogen fertilizers. In 2011, the company posted record sales of $5 billion, up by 57%. The company has also expanded its nitrogen facility in Oklahoma, adding 200,000 tons of ammonia per year to the production capacity. CF Industries made headlines when it announced that it is looking to buy Viterra Inc’s 34% stake in Medicine Hat nitrogen facility. In addition to these acquisitions, CF Industries has kept $1 billion to $1.5 billion aside for further acquisitions. Also the company is looking to spend around $2 billion over 3 years, with a purpose of expanding the output of its current nitrogen facilities.
Profiting From the Slide
The production of fertilizers requires Natural Gas, the price of which has fallen significantly, due to macroeconomic concerns around the globe. The reduced price of natural gas has reduced the expenses incurred in production, and are expected to reflect in the books of CF Industries in the coming quarters, in the form of added profitability.
Beating the Competition
CF industries faces competition from companies like Mosaic (NYSE: MOS) and Potash Corporation of Saskatchewan (NYSE: POT). The company has been outperforming its peers for the past 5 years, giving returns in excess of 240%.
Apart from the returns, the financial metrics when compared together, also tell the same story.
|
Company |
P/E |
PEG |
EPS next 5Y |
Net Profit Margin |
Return on Assets |
|
CF Industries |
8.2 |
0.77 |
10.68% |
30.48% |
21% |
|
Mosaic |
13.83 |
1.51 |
9.17% |
17.26% |
11.81% |
|
Potash Corp |
14.99 |
1.42 |
10.55% |
30.28% |
15.27% |
CF Industries is the most undervalued stock, enjoying the highest profit margins along with the best returns on assets. Analysts expect the EPS to grow at the rate of 10.68% for the next 5 years which is also the highest amongst its peers. The company beats its competition not only by numbers but also by performance. The EPS this year stands at a massive 311.81%.
The Bottom Line
The company in its recent results posted a 24% jump in EPS on a year on year basis due to the strong demand of nitrogenous fertilizers. The quarterly EPS stood at $9.31 against $6.75 in the year ago quarter. The reduced prices of natural gas saved the company 29% in supply expenses. The stock has risen more than 40% YTD, giving its investors solid returns.
The company has an aggressive approach, and is looking to expand even further. The low prices of Natural Gas are definitely helping the company, and is likely to do so, as the macroeconomic concerns do not appear to be fading away in the near term future. The company is also ahead of its competitors both in returns and metrics, and due to all these reasons, we think that CF Industries would make a good investment choice.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. 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.If you have questions about this post or the Fool’s blog network, click here for information.
