Will CF Industries Take Itself Private?

CF Industries (CF) is yet another fertilizer company whose valuation simply makes little sense. It reported stellar earnings  Monday and was up 12% early Tuesday morning. That sounds exciting, except when you realize that takes it all the way back to Friday's pricing... which is the 2nd lowest it has been in a year.

The company has a $2.5 billion market cap and $1.15 billion of pure cash on the balance sheet with another $190 million in investments. So effectively the business is being valued at $1.2 billion; or effectively $22-23 per share. A business on target to earn $16+ in EPS this year. So the base business is being priced at 1.5x earnings. Again, if instead of earning $20 next year as analysts expect and everything in the world goes wrong and earnings FALL by 50% next year, then we're pricing it at 3x 2009 earnings. This is how absurd valuations have become due to fear, hedge fund liquidations and the "all commodities are equal" thinking.

Now CF Industries deals mostly in nitrogen with a phosphates business. Nitrogen has been the weakest in pricing of the three nutrients of fertilizer, and of course the market looks forward. But what matters is not end price but MARGIN - the input for nitrogen is natural gas and that happens to be a commodity as well - that has been falling far greater than nitrogen prices. So the margin is not falling off a cliff. The bear case would have to be for 2009 that natural gas prices (input) prices rise while nitrogen prices fall (output) hence cramping margins. But that would be if anything traded on fundamentals anymore.

On the bright side, we are focusing on companies with cash flows, and I still think this is an excellent company to own once the market returns to any semblance of sense. As of last night they have issued a share buyback of "up to" $500M (again I do not like when company's announce buybacks without firm timelines as most do), and a very modest dividend of 10 cents a quarter. This is what you can do when you have massive cash flow as the fertilizer companies have.

If they do the full buyback, that is 20% of the company's valuation. And they STILL would have another $600M+ of pure cash left over to do another. And they are cash flow positive each quarter and generating even more cash for the future;  this is why as I've been writing about these fertilizer companies - if the market refuses to give them sensible valuations they literally can take themselves private within 3-4 years if they wish simply by snapping up all their shares with cash flow. But as we've said for nearly 5 months now, to this market oil = gold = fertilizer = natural gas = coal = copper = steel = it's all the same to the market. The differences between one subsector to another means nothing to the market.

• CF Industries Holdings, Inc. (NYSE: CF - News) today announced that its Board of Directors has authorized the repurchase of up to $500 million of the company’s common stock.
• “Our strong balance sheet is a result of our excellent financial performance over the last several years and our disciplined approach to deploying capital. While we continue to make progress on a number of long-term growth initiatives, investing up to $500 million in CF Industries’ common stock reinforces our commitment to careful stewardship of our shareholders’ capital,” explained Stephen R. Wilson, chairman and chief executive officer, CF Industries Holdings, Inc.
• The underlying fundamentals of our business today suggest that the company’s investment in its common stock should provide an attractive rate of return for our continuing shareholders, compared to some other near-term investing opportunities the company is considering,” Wilson added.
• CF Industries Holdings Inc. on Monday said its board declared a quarterly dividend of 10 cents. The fertilizer manufacturer said the dividend is payable Dec. 1 to shareholders of record on Nov. 14.

The full report is here but I won't bother going into a full analysis because no one looks at fundamentals anymore. Essentially they did $3.70 of EPS net of mark to market hedging on their natural gas hedging.

• At September 30, 2008, the company’s cash, cash equivalents, and short-term investments totaled approximately $1.15 billion. In addition, CF Industries held investments in auction rate securities at September 30, 2008 that were valued at $190.2 million, resulting in total cash and investments of more than $1.34 billion. This compares to total investments in cash, cash equivalents, short-term investments, and auction rate securities at September 30, 2007, of $730.4 million.

No position

Comments

[Vox Rationalis:]

On the cash position - best to include customer advances, which are payments made by customers for product not yet delivered. It looks like the addition of the auction rate securities this quarter came straight from the increase in customers' advance payments this quarter.

So cash, short-term investments, and ARS net customer advances increased from $555M to $574M, which makes sense. Pull out the negligible debt, and the company has a net cash position of just more than $10/share, or 17% of the stock's price.

Put another way, taking the cash and near-cash positions out of the company, and using the latest earnings estimates, and including the nice rebound these last few days, CF trades at no more than 3.2x next year's earnings. Estimates will continue to fall, but I wouldn't expect them to fall more than 40%, which would mean this stock is trading at at most 5x its earnings in The Worst Year Ever. Price/book remains right around 2.0, which is very comparable to Mosaic (also trading at about 3.0x, with a huge cash position, though also with considerable debt of unknown maturity).

2008 Oct 30 04:35 PM