A vital player in global food production
As North America's leading nitrogen producer, CF Industries (CF, Financial) operates primarily within the United States and Canada. A substantial majority, about 80%, of the company's nitrogen output is sold as fertilizer.
CF Industries plays a crucial role in global food production through its nitrogen fertilizers, which are essential inputs for modern agriculture. Ammonia is a crucial ingredient in the production of nitrogen-based fertilizers. Nitrogen is a necessary nutrient for plant growth. It's an essential component of proteins, enzymes and genetic material in plants. Nitrogen fertilizers boost crop yields by providing the additional nutrients that plants need to grow to their full potential, beyond what they can get from the soil naturally. By providing these products, CF Industries helps farmers around the world produce more food per acre of land.
Modern agricultural practices often involve growing crops intensively on a smaller amount of land, with multiple crops per year. These practices deplete the soil's natural nutrient content more quickly, making it necessary to replenish these nutrients with fertilizers. CF Industries' products are used on a variety of crops, including staples like corn, wheat and rice, as well as fruits and vegetables. This helps ensure a plentiful and diverse food supply.
History of financial success
The company has made significant moves in the past to expand its operations and increase its revenue. In 2010, CF Industries acquired Terra Industries, which added five production complexes in North America, a 50% interest in a joint venture in Point Lisas, Trinidad and a 50% interest in the GrowHow joint venture in the United Kingdom. Fast forward to 2015 and CF Industries acquired the remaining 50% interest in GrowHow from Yara International for $580 million.
Now benefiting from the affordability of North American natural gas, CF Industries' facilities are linked to key customers in the U.S. Corn Belt through a distribution network comprising pipelines, rail and barge. This gives the company a distinct advantage over competitors lacking direct pipeline access, thus resulting in lower transportation costs.
Recent earnings results
A month ago, CF Industries (CF, Financial) reported its latest earnings results for the first quarter of 2023, which included GAAP earnings per share of $2.85, outperforming estimates by $0.40. The company also posted revenue of $2.01 billion, exceeding expectations by $150 million despite a year-over-year decline of 30%. Over the last 12 months, the company brought in net cash from operating activities amounting to $3.41 billion and free cash flow of $2.33 billion.
The company used some of this cash to continue its share repurchase program, buying back over 1 million shares for a total of $75 million during the first quarter. Looking back at the last decade, CF Industries has brought its shares down from 277 million to under 195 million. Thus, we can likely expect the trend to continue, adding value for shareholders.
The company also announced two strategic developments during the quarter, including the signing of a definitive asset purchase agreement with Incitec Pivot Limited for their ammonia production complex situated in Waggaman, Louisiana. Additionally, CF Industries executed a memorandum of understanding with LOTTE CHEMICAL, a leading chemical company in South Korea. This agreement is for a joint venture to supply clean ammonia in South Korea. The market for Green Ammonia is one of the fastest growing globally and projected to reach $14.5 billion by 2030 according to estimates from Vantage Market Research.
Corn as a durable competitive advantage
The company’s sales and profits are significantly influenced by the acreage of corn planted. Corn, unlike soybeans, doesn't naturally produce its own nitrogen, thus necessitating the use of nitrogen fertilizers for maximizing crop yields. Thus, corn-planted acres greatly impact the demand for nitrogen in North America.
On the cost side, the risk is that natural gas prices rise as it remains the main ingredient used in nitrogen fertilizer production, accounting for nearly 50% of costs. The global fertilizer market seems to be normalizing, production and prices steadily recovering. However, long-term production will still be essential to its customers as well as the consumer. From a numbers standpoint, this has added up to significant growth and profitability.
Valuation
This is a tough company to value because despite record profits, the stock is down 32% over the last 52 weeks, and that includes the August 2022 highs above $117 per share. When stretched out over the long-term, I believe the company will continue to build shareholder value through acquisitions, buybacks and book value growth. That will happen whether the top and bottom lines rise consistently or not.
Since 2013, revenues have doubled and the company has booked close to $10 billion in total net profit. The next 10 years should be even better by my estimates, which coupled with a lower share count could mean a substantial increase in share prices. For example, let’s say CF Industries can double profits by 2033 (which I believe is feasible) and buys back the same amount of stock (~30%) as the past decade, giving it roughly 140 million shares. With current net income above $3 billion, that would put earnings per share above $40 in a decade. Admittedly, that may seem like a crazy high prediction, but I think the numbers might just add up. Add in dividend yield of 2.46% and CF Industries seems to have massive potential.
