Which Fertilizer Company Will Rocket Your Portfolio Higher

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

Agriculture is a very promising industry, and is likely to remain so. People the world over are realizing the importance of a healthy eating lifestyle, due to which organic food sales are at their record highs. Organic food sales in the US rose by 8.8% in 2010 and 9.4% in 2011, defying the recessionary conditions. Also since the global population is only increasing, the dependence on agricultural products is expected to rise.

According to the International Fertilizer Industry Association, the agricultural industry is expected to expand by 5.37% by the end of 2013, and some experts believe that agriculture is one of the fastest growing business segments in US. These facts provide a strong bullish case for fertilizer manufactures like CF Industries, Agrium and Potash Corporation.

Benefit by Remodelling

The subprime crisis dragged many industries down, and fertilizer stocks were not spared either. In the midst of the crisis, CF Industries (NYSE: CF) remodelled its business operations, and exited the potash market. Since the crash, shares of CF Industries have risen by more than 350%, and the company is now the second largest nitrogen fertilizer manufacturer in the US.

CF Industries owns a 75.3% stake in Terra Nitrogen (NYSE: TNH) and recently purchased a 66% stake in Canadian Fertilizer Limited. At the current price, the shares of Terra Nitrogen yield a hefty 7.84% which provides solid dividend income for CF Industries. Canadian Fertilizer owns Medicine Hat Nitrogen Complex, which is the largest nitrogen fertilizer producing facility in Canada.

Investor's Delight

Despite a 4% slump in quarterly revenues, the company was able to report a 24.3% jump in earnings. Earnings were up because, the shortage of nitrogen fertilizers in the market had driven up its prices. Since  drought conditions have spoiled this year’s crop yield, more farmers would be requiring fertilizers for the next plantation. This serves as a short term positive catalyst for fertilizer companies.

However to meet the long term increase in fertilizer demand, the board at CF Industries recently approved its $3.8 billion expansion plan. Under this plan two new facilities will be developed, which would be able to produce up to 2.1 million tonnes of gross ammonia, and up to 2.6 million tonnes of granular urea. To add to the investors delight, the company also announced its $3 billion share repurchase program.

Why Peers Can't Match Up

The company shares its market space with Potash Corporation (NYSE: POT), Agrium (NYSE: AGU) and Mosaic Company (NYSE: MOS). These three companies together market their potash fertilizers, internationally under the name Canpotex. Analysts don’t expect much from these companies, as farmers from India and China had cut down their potash fertilizer consumption, awaiting concessions from Canpotex. No discounts were given and the farmers switched to nitrogen based fertilizers.

Company

P/E

PEG

Debt/Equity

Gross profit margin

CF Industries

7.81x

0.73x

32%

51.03%

Agrium Inc.

10.16x

1.4x

34%

27.43%

Mosaic Company

12.45x

1.38x

8%

28.34%

Potash Corporation

13.93x

1.36x

47%

47.06%

The peers of CF Industries trade at higher valuations with lower gross profit margins. Due to the absence of any positive triggers, I believe that investors should stay distant from the competitors of CF Industries.

Foolish Conclusion

CF Industries has moderate debt/equity levels with an impressive P/FCF of 8.16x. The company retains 94% of its earnings, and has cash reserves in excess of $2 billion. Also its quarterly operating cash flows rose to $2.341 billion, up by 15.03%. Overall these numbers indicate that CF Industries has financially sound operations. The company has outperformed its peers (in terms of stock returns) and due to its solid financial performance and expansion plans, CF Industries gets a Foolish Buy Rating.

 
 


PiyushArora 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!

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