Will CF Industries Continue Its Plunge?

With shares of CF Industries Holdings (NYSE:CF) trading at around $178.14, is CF an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The biggest concern when looking at the CF Industries story is revenue. Revenue stalled in 2012. There was also a 14 percent decline in revenue last quarter on a year-over-year basis. The good news is that there are many positives for CF Industries, which include:

  • Largest nitrogen producer in the world
  • Solid margins
  • Strong cash flow
  • Healthy balance sheet
  • Consistent earnings improvements on an annual basis
  • Investments in lucrative projects
  • Strong Q4 earnings (11 percent increase year-over-year)
  • Strength in ammonia market
  • Favorable natural gas costs
  • High corn planting expectations
  • Strong domestic fertilizer demand

That’s an impressive list, but it’s still important to remain vigilant in this environment. In other words, despite all these positives, CF Industries still might be a dangerous investment due to macroeconomic trends.

Let’s get to some comparative numbers. The chart below compares fundamentals for CF Industries, Agrium Inc. (NYSE:AGU), and Potash Corp. of Saskatchewan (NYSE:POT). CF Industries has a market cap of $11.19 billion, Agrium has a market cap of $13.56 billion, and Potash has a market cap of $33.45 billion.

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CF

AGU

POT

Trailing   P/E

6.23

9.56

16.38

Forward   P/E

7.60

9.26

11.70

Profit   Margin

30.29%

8.95%

27.97%

ROE

34.30%

22.45%

23.41%

Operating   Cash Flow

$2.38 Billion

$2.12 Billion

  $3.22   Billion

Dividend   Yield

0.90%

2.20%

2.90%

Short   Position

2.20%

N/A

N/A

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio for CF Industries is close to the industry average of 0.30. Debt management has been good.

Debt-To-Equity

Cash

Long-Term Debt

CF

0.26

$2.28 Billion

$1.60 Billion

AGU

0.57

$726.00 Million

$3.96 Billion

POT

0.41

$562.00 Million

$4.08 Billion

 

T = Technicals Are Weak

CF Industries has underperformed the market as well as its peers year-to-date. CF Industries also offers the lowest yield of the three companies mentioned in this article (see chart in Catalyst section).

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1 Month

Year-To-Date

1 Year

3 Year

CF

-8.18%

-12.22%

-3.87%

107.20%

AGU

-8.67%

-8.16%

7.09%

45.84%

POT

-0.94%

-3.24%

-9.64%

10.16%

 

At $178.14, CF Industries is trading below all its averages.

50-Day   SMA

198.65

100-Day   SMA

206.35

200-Day   SMA

206.87

 

E = Earnings Have Been Strong              

Earnings have consistently improved on an annual basis. Revenue had been improving on an annual basis until 2012. Technically, revenue did improve in 2012 on a fractional basis, but even so, growth has slowed substantially.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

3.92

2.61

3.97

6.10

6.10

Diluted   EPS ($)

12.13

7.42

5.34

21.98

28.59

 

When we look at the previous quarter on a year-over-year basis, we see a decline in revenue and an improvement in earnings. However, revenue and earnings both improved on a sequential basis.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

1.72

1.53

1.74

1.36

1.48

Diluted   EPS ($)

6.59

5.54

9.31

6.35

7.39

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

On the positive side, abundant natural gas has helped lead to higher gross margin, the weather is expected to improve, and demand for fertilizer is expected to be high for the remainder of the year. On the other hand, agricultural chemicals are sensitive to weakening economic conditions.

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Conclusion

Based on respectable growth, strong margins, and quality debt management, it’s obvious that CF Industries is a good company. The problem is that the stock is highly sensitive to market corrections. For example, the stock lost more than 60 percent of its value in 2008. It should be noted that Agrium is the only company of the three mentioned in this article that has continued to see solid revenue growth. However, Agrium still isn’t resilient to steep stock market corrections.

There might be upside potential here, but risks greatly outweigh potential rewards. CF Industries is a STAY AWAY.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I am currently short technology, financials, the Russell 2000, and the euro.

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