If food is part of your investment strategy then the fertilizers are what you’ll want to own. CF Industries Holdings Inc. (CF) is trading at just 9.5x forward estimates even as crop prices skyrocket and farmers find themselves awash in cash.
This Zacks #1 Rank (strong buy) manufactures nitrogen and phosphate fertilizers. It is the largest nitrogen fertilizer distributor in North America with manufacturing facilities in the United States and Canada. It is also the third largest phosphate manufacturer with operations in Central Florida.
CF Industries is coming off a tough year as it acquired rival Terra Industries in 2010 but it wasn’t without a fight. The company then had to fend off a possible acquisition from rival Agrium, which ultimately resulted in Agrium withdrawing its offer.
CF Surprised in the Fourth Quarter
On Feb 17, CF Industries Holdings reported its fourth quarter results and beat the Zacks Consensus Estimate by 3 cents. Earnings per share were $2.65 compared to the consensus of $2.62. It made just $1.04 in the fourth quarter of 2009.
Sales jumped 144% to $1.2 billion from $506.7 million in the year ago quarter but also included sales of $451.2 million from Terra. Even subtracting Terra, sales still rose 47% from last year.
The quarter was boosted by several factors including a significant rise in fertilizer prices due to domestic demand, strong international markets, low fertilizer inventories and favorable weather for fall application in the U.S. Midwest.
Nitrogen sales climbed 185% to $1 billion from $352 million in the fourth quarter of 2009 due to higher product prices.
Bullish Outlook on Farming for 2011
CF is optimistic about 2011 mainly because of high crop prices which remain near record highs. Corn farmers use nitrogen and CF expects 92 million acres of corn to be planted this spring, up about 4 million acres from last year.
Global fertilizer supply/demand balances are also expected to remain tight through the spring which will support prices.
Strong Earnings Growth Projected for 2011
After fourth quarter results, analysts moved to raise estimates for both 2011 and 2012.
The 2011 Zacks Consensus Estimate jumped $1.14 to $13.63 in the last 30 days. That is earnings growth of 58.1% from 2010.
Analysts aren’t so sure about 2012 though. While 10 estimates have been revised higher on 2012, the Zacks Consensus Estimate has risen to just $12.46 from $11.43 in the prior month. That is an earnings decline of 8.6%.
CF Is Cheap
With a forward P/E under 10, CF Industries is cheap compared to the S&P 500 which is trading at 14.2x forward estimates or its peers in the fertilizer sector. Potash (POT) is trading at 18.6x and Mosaic (MOS) at 19.8x.
CF also has a price-to-book ratio of just 2.1, well within the value parameters of under 3.0.
The company also pays a small dividend, with a yield of 0.3%.
Shares Not Yet At Pre-Recession Levels
While shares have been moving higher over the last year, gaining 28% during that time, they have yet to regain pre-recession levels when fertilizer prices were very high.
[In full disclosure, the author of this article owns shares of CF.]
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service. You can follow her at twitter.com/traceyryniec.
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