Two Reasons CF Looks Headed for Big Profits

by Matt Weinschenk

A Rare Bump for a Buyer…

What do a Wall Street analyst and a corn farmer have in common? They both know that fertilizer prices have fallen off a cliff.

Last year, a big increase in the demand for nitrogen-based fertilizers led the price of fertilizer and the value of the companies that make it to triple-digit gains.

But when the commodities market cooled, fertilizers were no exception. Since then, the prices of fertilizer – and the companies that produce them – have dropped straight back to Earth.

Take a look…

That’s why CF Industries’ (NYSE: CF) recent announcement made such big news. Amid collapsing share prices and notoriously tight credit for mergers and acquisitions, CF Industries announced Friday an offer to buy out smaller-player Terra Industries (NYSE: TRA).

Terra Industries popped 27% on the news, and CF Industries rose 2.73%. Normally, a buyer taking on a pile of debt to finance a deal that may or may not work out will see a little bit of a decline.

But two things are at play here:

1) The market thinks this is a good fit.

CF Industries expects to save $100 million over two years by combining forces. That’s nothing to sneeze at for a company that would have combined revenues just over $6 billion. This puts CF in position to maintain a much more competitive position over bigger players like Potash Corp. (NYSE: POT) and Terra Nitrogen (NYSE: TNH).

2) The future for fertilizer will be like the past.

Unfortunately, food production is going to be a major global problem for the next few decades. It will quite possibly be the biggest problem our species will ever face. And one of the only ways currently available to increase production is to load up on powerful nitrogen fertilizers. And since supply is finite, long-term prices have only one way to go.

Fortunately for CF Industries and other fertilizer companies, this spells profits. And for CF, the purchase of Terra Industries has likely improved their position to compete in that niche.

Comments

[legmaker:]

It will be interesting to see if TRA accepts the bid, and or another company gets into the bidding war. Not only is it a good fit, I think that CF is getting them quite cheap, and there very well could be an opposing offer. It seems that all of the fertilizer companies know that there are good times ahead. Technologies improving margins and a growing world eating more meat everyday, has caused much more volatility. Not to meantion the biofuels situation. At some point soon the economy wil pull out of this financial mess, and these companies should take off. The one thing about the fertilizer industry to remember is management. The reason this is so important is that for decades the fertilizer industry has run on very low margins, and slow methodical growth. The managers of these companies are masters of pinching the penny. They will take the downturn in stride and come out well. No matter what happens bot companies are cheap, and global demand should increase to where it was within the next year. Great hypothesis.

Jan 21 09:43 AM

[wosg:]

I believe TRA owns about 70% of TNH, they are sister companies.

Jan 21 10:13 AM

[raytayzmd:]

....say what:

"food production is going to be a major global problem for the next few decades. It will quite possibly be the biggest problem our species will ever face. And one of the only ways currently available to increase production is to load up on powerful nitrogen fertilizers."

...my impression is that US food production alone could probably feed the entire world...the problem is GREED prevents the food from getting to the people that need it...why do you think taxpayers are forced to give billions in subsidies to farmers?...from 1996-2006, American taxpayers shelled over 140 BILLION dollars to keep farmers from growing too much food:

farm.ewg.org/farm/top_...

...nah, don't need no more stinking fertilizer -- just need to open up the markets.

Jan 22 01:00 AM

[Ron Finberg:]

"And one of the only ways currently available to increase production is to load up on powerful nitrogen fertilizers. And since supply is finite, long-term prices have only one way to go."

If you look at TRA's earning reports, their record revenues and profits are due only to higher sales prices but actual volume growth for their most expensive products has been negligable. This is in contrast to MON, POT and others that have experienced both higher sales volumes due to increases in planted acreage and higher pricing.

In all likelihood, nitrogen prices collapse in 2009.

That saying, AG stocks still look pretty cheap but their growth engine was proven to be completely speculative.

Jan 22 08:39 AM

[Bobco23:]

Guys, back up the truck for any nitrogen fertilizer manufacturer. Natural gas represents up to 90% (check it out on the web) of the direct cost of nitrogen fertilizer production and the're giving natural gas away. Prices have come down but are not crashing. As a famer, I can tell you no farmer is going to let his invested capital sit idle. If prices fall, farmers will buy more to increase yield per acre owned (i.e., invested capital). Farming is a volume business and fertilizer drives volumes; big time.

THN is partially owned by TRA. It is organized as a MLP and has had a monster distribution for the last 2 years; a real cow. I can't determine if THN is going with the deal or if it will remain independent. I own a bit of THN and if it remains independent, I'm buying more. MLPs appear to be underfollowed, and perhaps too small to be attractive in the big player market. Many seem to be undervalued, particularly THN.

Jan 22 08:05 PM

[thannagan:]

Why buy back your own stock when its cheap if you can use those funds to buy out an equally undervalued competor - kind of like killing two birds with the same shot.

Jan 24 04:49 PM