Seeking Alpha

Dan Loeb cites dividend potential in CF Industries buy

  • More on CF Industries (CF +10.1%) from Dan Loeb: "We believe its structural cash flow generation strength is misunderstood and that management should deliver a much larger dividend to its shareholders. Such a dividend would highlight the sustainability of its cash flow generation and lead to a substantial re-rating." (earlier)
  • Josh Brown: "Dan Loeb is the last of the marquee name hedge fund managers with the aura intact. So CF Industries goes vertical on his buy."
  • Potash peers: RNF +4.1%, AGU +2.5%, TNH +2%, MOS +1%, POT +1%.
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Comments (6)
  • Chris Damas
    , contributor
    Comments (1403) | Send Message
     
    Investors in CF should take the Loeb news as a good opportunity to get out. UAN, their main product, is at $220 down 50% yr/yr.

     

    Sure, CF could raise their dividend. But they didn't. That should tell you something.
    29 Jul 2013, 03:36 PM Reply Like
  • StayCool
    , contributor
    Comments (141) | Send Message
     
    Hey Chris I am with you. A record corn crop and lower corn prices ahead mean that farmers won't have the ability to spend more on fertilizer. Therefore the price per ton heads south impacting all of these companies earnings. Don't get me wrong I love these companies BUT the fundamentals and earnings warnings are a warning of lower prices ahead. Remember hope is not a strategy!!
    29 Jul 2013, 05:32 PM Reply Like
  • RS055
    , contributor
    Comments (3650) | Send Message
     
    Stock goes up 12% instantaneously because .... one Dan Loeb ( whoever he may be) has taken a stake! if that does not prove just how stupid these hedge fund driven markets have become nothing will.
    29 Jul 2013, 05:59 PM Reply Like
  • Chris Damas
    , contributor
    Comments (1403) | Send Message
     
    CF was a sitting duck for someone like Loeb to push higher. We don't know how much they bought but buy some and make an announcement is right out of the hedge fund playbook for quick results. I read the outline of their analysis courtesy of Forbes - was trading at about 9X FCF based on $275 N prices whatever those are (average of UAN, urea, AN and ammonia?. UAN was recently $220/st and urea about $320. So after today's gain CF is trading at above 10X FCF. But the sustainability of those earnings is in doubt.

     

    UN FAO says the world will be amply supplied with cereals (rice aned coarse grains) and the weather indicates a bumper US corn crop. In the meantime, UAN and urea at the Gulf are plumbing 2010 lows with the potential for increased import competition. Retail prices and volumes in the midwest are sluggish and dropping.

     

    So yeah, CF looked cheap but $180 but what's the catalyst for change? Not higher US grain or N prices. Loeb isn't going to get on the CF board anytime soon as they are a Delaware corp and resist outsiders.
    29 Jul 2013, 06:14 PM Reply Like
  • aretailguy
    , contributor
    Comments (1484) | Send Message
     
    Chris, thanks for telling it like it is.
    29 Jul 2013, 06:21 PM Reply Like
  • Chris Damas
    , contributor
    Comments (1403) | Send Message
     
    I read the full Third Point letter describing the CF strategy and I can say, it isn't particularly good. Anyone who starts off by saying CF is one of the lowest cost nitrogen producers in the world just forgot about the strong USD and Qatar, Oman, Saudi Arabia, Kuwait and Algeria, which all have cheap flare gas and are all exporting urea like crazy to the USA. Then there are the Russians. And don't forget Canada's Agrium. AECO hub gas is depressed at $2.56/mcf, a full buck below NYMEX. Canada suprisingly perhaps to some, is one of the biggest ammonia and urea exporters to the USA as they have the biggest farm input retailing operation.

     

    The way Loeb gets to the $1.2 billion in base free cash flow I think is roughly this: At $5 nat gas, ammonia costs about $200/short ton to make. A ton of urea needs 0.58 tons ammonia plus carbon dioxide and conversion materials (steam, catalysts, heat to dry it into prills etc etc). So you might have a cost of $150/st urea, which Loeb puts down as selling net for $250/st ($275/mt). A $100 per ton margin on 13.8 million tons of urea equivalent production gets you $1.38 billion in gross margin. But someone forgot to factor in income taxes on operating income after depreciation and amortization and SG&A and then there is the interest shield. You might get $1 billion in cash flow after taxes and then there is maintenance CAPEX on 13 or so plants. If we have $275 urea prices you might assume UAN, DEF, AN and NA prices all drop in concert. There are alot of assumptions in their one pager on CF. And they totally ignored the value of the phosphate businesses and the offshore JV's and of course, you have to take out the minority interests for example on Terra Nitrogen. By the way, if they like CF, are they buying that too? Up $8.

     

    Yes, the CF dividend seems paltry given the cash flow and I was surprised yet again, they didn't raise it (40 cents with a record date of Aug 16). But let's say CF doubled the dividend annual rate o $3.20 per share tomorrow. The stock would still only be yielding 1.6%. Would you run out and buy CF for the dividend, or would you be looking at commodity prices and what they are going to earn next year? Maybe Loeb should ask JANA how they made out at Agrium. I think Agrium would have been a better target and I expect Agrium to beat whereas analyst Q2 estimates have come down from $7.99 a couple of weeks ago to about $7.65 where I had pencilled in their Q2. Good luck with that Dan - but sure, it will rally until you sell it.
    29 Jul 2013, 10:01 PM Reply Like
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