Here's My Argument For Investing in CF Industries

Nitrogen fertilizer producer CF Industries Holdings (NYSE: CF  ) is a company that agriculture investors should pay attention to. CF Industries may be flying under the radar of many investors since it's having a tough time keeping profits afloat during a poor operating environment for fertilizer. Despite this, CF Industries deserves serious consideration because it's making big moves that should benefit investors greatly over the long term.

Business is better than it seems
Investors may hesitate to consider CF Industries in light of the struggles it's having this year. That's due to some severe headwinds facing the global fertilizer market. Global nitrogen prices have declined considerably in addition to the company having to endure the traditional seasonally slow third quarter. In all, CF Industries' profit is down through the first nine months of the year. But even amid such a difficult operating environment, CF Industries saw profits drop 10% through the first three quarters, which represents an entirely manageable decline.

Going forward, CF Industries' management remains entirely confident in its future. That's because of the favorable underlying economics of the agriculture industry that still remain intact. Despite poor fertilizer pricing, CF Industries continues to see strong product demand. Moreover, management points to the company's low-cost provider status in the North American market as a key catalyst for rising future profits.

Shaking things up
Under pressure from noted investor Dan Loeb to increase its paltry dividend, CF Industries announced it would evaluate its dividend, and over the next three years expects to devote $2 billion to capital returns and growth efforts. Loeb, famous for his investor activism, took a 1.5% stake in CF Industries and earlier this year the company significantly increased its dividend, from $0.40 per share to $1 per share.

In addition, CF Industries announced several strategic agreements with fellow agricultural nutrient supplier Mosaic (NYSE: MOS  ) . CF Industries will sell its phosphate mining and manufacturing business to Mosaic for $1.4 billion. Furthermore, CF Industries will provide 600,000 to 800,000 tons of ammonia per year to Mosaic. This should pay dividends for both companies, as each will be able to enhance what they do best. CF Industries will be able to focus on its nitrogen business, and the agreement supplements Mosaic's already considerable phosphate operations.

Not only is CF Industries evaluating its dividend to appease investors going forward, but the company is also in preliminary talks with advisors to create a Master Limited Partnership. MLPs have their earnings shielded from corporate taxes so long as they operate in a natural resource business. That, of course, goes without saying, since CF Industries is the largest maker of nitrogen fertilizer in the United States. This shouldn't be a difficult endeavor, since CF Industries is currently the owner of the general partner of Terra Nitrogen (NYSE: TNH  ) , a fertilizer MLP itself.

It seems plausible that Terra Nitrogen and a newly formed MLP from CF Industries would share many characteristics, primarily a huge distribution. Terra Nitrogen is also seeing difficult business conditions this year. Net sales and net earnings are both down through the first nine months of the year. This is having a see-saw effect on the company's distribution. Terra Nitrogen distributed $2.02 per unit in November, down nearly half from the previous quarter's payout. It's unclear whether an MLP spun off from CF Industries would carry the same level of volatility in its own distribution.

Keep an eye on CF Industries
Nitrogen fertilizer is a tough market right now due to falling prices. This is having a negative effect on most industry players, so naturally CF Industries is not immune to broader economic difficulties. However, CF Industries faces a bright future. The underlying conditions of the fertilizer industry should reverse soon thanks to strong worldwide demand. CF Industries is taking significant steps now to reap future benefits, including its promising partnership with Mosaic.

Investors stand to win with CF Industries, especially if the company funnels its assets into an MLP. That would give investors the chance to earn hefty distributions as the underlying economics of the fertilizer industry improve. As a result, investors interested in the agriculture should give consideration to CF Industries.

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