Agriculture looks like a promising industry for the long-term as farmers increasingly work to maximize crop yields. Larger crop yields will be needed to meet the demand of the growing worldwide population. One company with standout high-growth fundamentals is CF Industries Holdings, Inc. (CF).
CF Industries is a $13.58 billion Deerfield, Illinois based large-cap manufacturer of nitrogen and phosphate fertilizer products. It is the second largest nitrogen fertilizer producer in the world and the third largest phosphate fertilizer producer among public companies.
Operating Cash Flow (TTM)
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5-Yr. Annual Expected Earnings
We can see from the chart that CF Industries is the most undervalued company with the highest expected annual 5-year growth. Potash also looks promising and has fundamentals that are somewhat close to those of CF - however, CF has a slight edge with valuation and growth. Mosaic and Agrium are lagging in expected earnings growth and will probably not grow any faster than the overall market.
CF achieved an increase in sales of 9.7% for the first 6 months of 2012 over the same period last year. It also achieved a 39% increase in net earnings per share for the first half of the year over the first half of last year.
Interestingly, CF owns 75.3% of Terra Nitrogen Company L.P. (TNH). TNH is a master limited partnership with a generous 7.1% yield. TNH owns a nitrogen manufacturing facility in Oklahoma. The assets, liabilities, and earnings of the partnership are consolidated into CF's financial statements.
CF also has a 66% economic interest in the largest nitrogen fertilizer complex in Canada through Canadian Fertilizers Limited. The company's other joint ventures include 50% interests in each of the following fertilizer businesses: GrowHow UK Limited in the U.K; Point Lisas Nitrogen Limited in the Republic of Trinidad and Tobago; and KEYTRADE AG in Switzerland.
CF has increased its operating cash flow by an average of 74.5% annually in the past two years. The company's balance sheet also looks great with a current ratio of 3.6.
CF is planning to spend about $400 million on capital expenditures in total for 2012 as compared to $247.2 million in 2011. These funds will be used to maintain its asset base, to increase production capacity, to improve plant efficiency, and to comply with environmental, health, and safety requirements.
With CF's current undervaluation, growing cash flows, and high expected earnings growth, now is a good time to invest in the company as a long-term play in agriculture. If the company meets or exceeds earnings expectations, investors should expect the stock to double in five years.