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By Fani Kelesidou

The agricultural chemicals industry depends heavily on the growth of the fertilizer market. During the recent global financial crisis, demand for fertilizers remained tight, primarily due to increased raw materials prices. However, the "Medium-Term Fertilizer Outlook 2012-2016" report released by the International Fertilizer Industry Association suggests a steadily growing global demand for fertilizers. In particular, the industry is expected to grow 2.8% this year. Another 2.5 percent growth is anticipated by the end of 2013. Overall, the persistent need to supply the fast-rising food market will enhance fertilizer demand in the long-term. The rise of China and other Asian nations is also an important driving factor. South Asia alone is estimated to account for about 60 percent of the net increase in world demand. CF Industries, Inc. (CF) is one of the companies which is expected to benefit from the above mentioned accelerating trends.

Company Profile

Established in 1946 as a fertilizer brokerage operator, CF Industries has come a long way since then. It followed an impressive expansion model and diversified into the fertilizer market. CF Industries serves both wholesale distributors and resellers in the agricultural, industrial and garden businesses. It is the second largest provider of nitrogen products and the third largest provider of phosphate fertilizers in the world. It operates a competitive fertilizer distribution system in North America and serves offshore customers through the Port of Tampa, Florida. In 2010, CF Industries acquired Terra Industries which also owns Terra Nitrogen (TNH). CF Industries holds a 50 percent interest in Keytrade AG as well. The company employs approximately 2400 people.

Financials

CF is among the most well-positioned fertilizer producers within the industry. It holds an outstanding 15.9 percent three-year average revenue growth rate versus the industry's average of 4.9 percent. Over the past three years, EPS grew by 21.9 percent, while the industry's same variable stands at 7.3 percent. Five-year net sales average growth rate stands at 24.57 percent.

For Q2 2012, the company reported a 4 percent decrease in net sales compared to the same period in 2011. Net sales in the second quarter of 2012 totaled $1.7 billion. The decline in net sales was primary attributable due to lower volumes and phosphate product prices. However, this decrease was partially offset by a strong spring demand and tight inventory levels in the nitrogen segment. These conditions led to an upstream in nitrogen product prices.

CF reported second quarter 2012 net earnings attributable to common stockholders of $606.3 million. In the second quarter of 2011, net earnings amounted to $487.4 million. Q2 2012 results included a $77.6 million non-cash pre-tax mark-to-market gain on natural gas derivatives. These items increased after tax earnings per diluted share by $0.74. EBITDA was approximately $1,054.4, up by 19 percent compared to $889.2 million in Q2 2011.

Overall, the company has a current ratio of 3.60 and a long-term debt-to-equity ratio of 0.32. Gross profit margin and net profit margin account for 51.03 and 30.48 percent of total sales, respectively.

Competition

Some of the company's major competitors include Agrium Inc. (AGU), Potash Corporation of Saskatchewan Inc. (POT) and Monsanto Co. (MON).

CF

AGU

MON

POT

Market Cap

$13.77 billion

$16.44 billion

$47.53 billion

$35.86 billion

Sales

$6.39 billion

$1.63 billion

$13.52 billion

$8.33 billion

EPS [ttm]

26.23

10.31

3.77

2.88

Operating Margin

48.35%

13.34%

23.29%

43.80%

Profit Margin

30.48%

9.74%

15.44%

30.28%

ROE

35.29%

24.22%

17.44%

30.32%

ROA

20.99%

11.73%

10.42%

15.27%

Current Ratio

3.60

1.84

2.30

1.46

Debt-to-Equity Ratio

0.32

0.34

0.18

0.47

Data derived from finviz.com

It is evident from the table above that CF stands at the forefront of the agricultural chemicals Industry. The company's fundamentals reveal a strong financial position, as well as promising profitability prospects. Sales volumes appear relatively low compared to the company's peers. However, the company has a manageable debt-to-equity ratio. Cash provided from operating activities have a year-over-year growth rate of 74.05 percent.

Valuation Metrics

Currently, CF is trading at $213.25. Considering the strength of its fundamentals the stock is trading at attractive valuations, especially compared to its peers.

CF

POT

AGU

MON

Industry

P/E

8.13

14.44

10.06

24.00

14.00

Forward P/E

8.63

11.18

10.36

18.10

N/A

PEG

0.76

1.37

1.38

2.27

N/A

P/S

2.09

4.29

0.98

3.57

2.50

P/B

2.66

4.07

2.24

4.08

3.60

Data derived from finviz.com

CF Industries beats its competitors in terms of valuation as well as performance. For the past five years, the company has been outperforming its peers. The EPS growth this year stands at an impressive 311.81 percent. Five-year projected EPS growth rate is 10.68 percent, which is again higher than its peers' same rate. Overall, at current valuations, combined with the strong fundamentals, CF looks like an intriguing investment. Analysts' average mean target price is $239.50 with a consensus recommendation rating of "buy."

Summary

CF Industries is expected to benefit from a series of factors, which enhance its growth and cash generation potential. The medium-term estimated market outlook suggests anticipated demand acceleration, especially in the nitrogen segment. The nitrogen segment remains a significant driver for the company's profits. Strong demand for nitrogen fertilizers led to a 24 percent increase in EPS for the second quarter of 2012.

The decline in natural gas prices acts as a cost advantage for CF's nitrogen production. In addition, the company follows an aggressive expansion strategy supported by large capital investments. Based on valuation multiples CF is trading at discount levels. It exceeds its competitors in terms of returns, metrics and financial position. Overall, I strongly suggest that CF will continue to generate meaningful profits and apply a prominent performance.

Source: The Bullish Case For CF Industries