Why CF Industries Is Hitting All-Time Highs

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Fertilizer and agriculture stocks have generally been weak over the past couple of years. However, one company has been bucking the trend: CF Industries (NYSE:CF).

If we look at the performance of CF Industries over the past year, it has significantly outperformed other agriculture stocks as measured by the Market Vectors Agribusiness ETF (MOO). CF is up over 30 percent, whereas MOO is flat.  Furthermore, the Global X Fertilizer ETF is down 16 percent over the same time frame.

Why has CF done so well and why did it hit an all-time high earlier this week while other fertilizer stocks and agricultural commodities are coming off of lows?

The answer is fairly simple: CF was better managed. CF’s management aggressively expanded its business in 2010 by buying Terra Industries and expanding to become the leading nitrogen-based fertilizer producer in North America. As fertilizer prices rose, CF Industries’ profits skyrocketed from $349 million in 2010 to more than $1.4 billion last year, and in each of the previous two years. The company has been aggressive in using this cash flow to raise its dividend from 40 cents per share to $4 per share, and to buy back stock. Even while fertilizer prices were falling in 2012 and in 2013, CF was able to maintain its strong cash flow in order to outperform the competition.

The investment case for CF is perhaps stronger now than ever. The company trades at about 11-times trailing earnings, and it is in a position to potentially raise these earnings significantly over the next couple of years. Not only is it growing production through its Donaldson plant, but with agricultural commodities apparently bottoming, we could see fertilizer prices rise, and this will go straight to the company’s bottom line.

One thing that investors do need to be slightly concerned about is a rise in natural gas prices. Natural gas is the number one input cost for producing nitrogen-based fertilizers, and while CF has hedged some of its natural gas exposure, it is vulnerable to a price spike.

Furthermore, CF Industries might not be the best fertilizer investment for everybody. While nitrogen fertilizer is the most heavily used by farmers, it may not be the best performer of the three major fertilizer products: nitrogen, phosphates, and potash. The latter two products are mined, and they are scarce resources. Nitrogen-based fertilizers are manufactured. Investors looking for more leverage to the fertilizer market and by extension to grain prices should gravitate toward companies that produce phosphates and potash — if grain prices spike, then these two commodities will fly, as well.

With this being the case, I am surprised that CF sold its phosphate mine to the Mosaic Co. (NYSE:MOS) last year near the bottom of the market. While I certainly understand why a company would want to focus on just one asset such as nitrogen, phosphates have a particular appeal insofar as they are generally scarce, and insofar as most of the world’s known phosphate reserves are found in one part of the world — Western Africa. This latter fact makes a North American phosphate deposit especially appealing.

Those who agree with this sentiment should consider spreading their risk by owning both CF and Mosaic. But while I think Mosaic was probably a winner in that deal, there is no denying that CF has done a better job than any other fertilizer producer of generating shareholder value through strong and weak markets. With this being the case, investors can still own CF shares despite the fact that they are trading near all-time highs.

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