How High Can CF Industries Fly?

Shares of CF Industries (NYSE: CF  ) hit a 52-week high today. Let's take a look at how the company got there to find out whether clear skies remain on the horizon.

How it got here
Fertilizer industry watchers should be little surprised that CF, the largest North American nitrogen fertilizer producer, has been nudging upward lately. Fertilizer prices keep going up, corn plantings are at or near all-time highs, and CF benefits from the combination of extremely low input costs (from dwindling natural gas prices) and high finished materials costs coupled with intense demand. CF and majority-owned Terra Nitrogen (NYSE: TNH  ) have both soared as a result.

CF Total Return Price Chart

CF Total Return Price data by YCharts

Terra distributes sizable earnings to shareholders, giving CF a nice recurring income stream with almost no legwork necessary. Both companies have far outpaced fertilizer companies such as PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , which focus more on potash- or phosphate-based fertilizer. It also doesn't hurt that Moody's raised CF's credit investment grade with a positive outlook yesterday.

What you need to know
Nitrogen fertilizer companies are generally doing fabulously, with CVR Partners (NYSE: UAN  ) also nudging against 52-week highs despite narrowly missing analyst estimates for its earnings this week.

Company

P/E Ratio

Annualized 3-Year Earnings Growth

Net Margin (TTM)

CF Industries 9.1 63.2% 25.2%
Terra Nitrogen 17.0 52.1% 36.1%
PotashCorp 13.6 46.5% 36.6%
CVR Partners 19.5 31.8% 43.7%
Mosaic 11.2 2.3% 18.6%

Source: Yahoo! Finance. TTM = trailing 12 months.

As you can see, there are still plenty of bargains in the sector, with CF's single-digit P/E making it still the best value. On the other hand, its dividend looks comparatively puny next to CVR's 8.5% yield or Terra's 6.6% yield. Mosaic, despite competing on valuation, has grown earnings far less and seems to be a more stagnant company than the fast-growing nitrogen producers.

CF's net income has soared in the past two years, far outpacing the actual growth of its stock price. When I recently investigated Terra's tailwinds, I found little reason to doubt the continued strength of nitrogen-based fertilizer companies, and CF will certainly be taking full advantage of those tailwinds as well.

What's next?
Where does CF Industries go from here? That will depend on how eager farmers are to pay higher prices for fertilizers to juice crop yields. This year, at least, there's every indication that farmers are quite eager for more yields, which is great news for CF. The Motley Fool's CAPS community has given CF a coveted five-star rating, with only 44 of more than 1,200 participants expecting the stock to reverse its 52-week trend. Count me among them -- I've had my own outperform CAPScall on CF since last fall, and plan to maintain it.

Interested in tracking this stock as it continues on its path? I highly recommend adding both CF and its fellow fertilizer producers to your personalized stock watchlist for daily updates, as what affects one can easily affect the others.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services have recommended buying shares of PotashCorp. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 03, 2012, at 4:07 PM, mcpayer wrote:

    Wonder why RNF is not included as a nitrogen producer ? DD by a Fool is normal. Shame.

  • Report this Comment On May 03, 2012, at 6:13 PM, TMFBiggles wrote:

    @ mcpayer -

    RNF hasn't existed long enough as a public company to be a fair comparison to the others. It's only been public since November.

    - Alex

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