CF Industries Is An Attractively Priced Fertilizer Company With Strong Margins

Geoffrey Rocca profile picture
Geoffrey Rocca

CF Industries Holdings (NYSE:CF) is the largest producer of fertilizers in North America, with a sales volume of roughly 13,000 tons of nitrogen fertilizer and roughly 2,000 tons of phosphate fertilizer in 2011. Furthermore, the company is on course to match that achievement in 2012. CF Industries sells a vital input into the agriculture sector and presently offers a free cash flow yield of 13.25% based on full-year 2011 results, while the year-to-date 2012 results are equally promising.

Recent economic conditions, specifically the cheapness of natural gas and the current high acreage of corn planted in the United States, have served to expand CF Industries' gross and net margins in its nitrogen business over the past few years and convinced the firm of the wisdom of an expansion of productive capacity. To that end, in 2010 the company acquired Terra Nitrogen, which approximately doubled the firm's nitrogen fertilizer capacity, and the company also recently announced a further capital expansion plan that is projected to increase fertilizer capacity by potentially an additional 4,000 tons per year. The bulk of CF Industries' operations are in the Midwestern region of the United States and Canada, apart from the phosphate mine located in Florida. The company also has an interest in two joint ventures to produce nitrogen, one located in the United Kingdom and the other in in Trinidad and Tobago, and another joint venture in a fertilizer trading company in Europe.

The primary input for the production of nitrogen fertilizer is natural gas, which accounted for 45% of the cost of production in 2011. The cheapness of natural gas in the United States has resulted in substantial margin improvements over the last few years. These improvements may be expected to persist under two conditions: Either natural gas stays cheap in the future, or the fertilizer industry is capable of

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Geoffrey Rocca profile picture
I am a California licensed attorney and have over six years' experience as an analyst and investor. My focus is on value investing opportunities in the equity and high yield fixed income areas.

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