I've written before about the one fertilizer company that looks poised to weather any storm because of its strong fundamentals. But is CF Industries (NYSE: CF) totally free from weaknesses? No company is perfect, and only a detailed scrutiny can give us a clear picture.
Strengths
- Nitro king: CF Industries became the largest North American nitrogen producer after acquiring most of Terra Nitrogen (NYSE: TNH). With demand for nitrogen rising much faster than that of potash and phosphate in the past few years, CF is in a better position than peers Mosaic (NYSE: MOS) and PotashCorp (NYSE: POT) that focus more on the other two nutrients.
- Prolific investments: A major part of CF's investments is going into ramping up nitrogen capacity by clearing the bottleneck at the ammonia plants that came along with the Terra acquisition. Apart from that, the company is wisely upgrading greater amounts of ammonia to higher-valued urea ammonium nitrate, or UAN, a strategy being aggressively pursued by UAN specialist CVR Partners (NYSE: UAN) as well.
- Solid performance and shareholder value: CF reported record revenue and net profits in 2011. Its top and bottom lines have grown at compounded average rate of a mind-blowing 52.9% and 105.2%, respectively, over the past two years. The company also has a solid return on equity of 37.6%.
- Excellent financials: CF is one of the few companies generating higher cash flows than net income. Its debt level seems manageable, too, with a total debt-to-equity ratio of 32.8%. With an interest coverage ratio of 18.8 and cash balances of $1.2 billion as of Dec. 31, the company can boast of solid financials.
Weaknesses
- Too aggressive: CF may have acted a little too fast by hedging nearly two-thirds of its estimated 2012 natural gas (its principal raw material) requirement by Dec. 31. Gas prices are currently almost half of what CF incurred in its last quarter. And a price change of $1 per million British thermal units would mean a change of roughly $156.3 million in the company's unrealized mark-to-market gain/loss (pre-tax). So CF has not only lost out on a huge opportunity of cashing in on the sharp dip in natural gas prices, but it also stands to incur potential losses on its derivative contracts if natural gas prices do not recover.
- Low dividend: One would expect a financially sound company like CF to pay out high dividends. But CF's dividend payout ratio is just 4.5%, and it yields only 0.9%.
Opportunities
- Betting on corn: CF stands to gain the most among fertilizer players if corn plantations hit a record high this year as the U.S. Department of Agriculture predicts, primarily because nitrogen, which forms the biggest portion of CF's revenue, is a key nutrient in corn production.
- Global demand: Growing population and increasing food consumption, especially in populous countries such as China and India, will mean higher demand for the crop as well as CF's nutrients.
Threats
- Fierce competition: The fertilizer industry has big and powerful players, with most undertaking major expansions. So CF has to consistently find ways of maintaining its market share.
- Sensitive share prices: CF's share prices tend to get affected by any release of crop-related data or reports, resulting in a fair amount of volatility and uncertainty.
- Cautious emerging markets: Delayed purchase by high-demand markets such as India and China could mean a slowdown in business for the company.
The Foolish bottom line
CF looks like a good package overall, but a lot also depends on how it tackles macroeconomic challenges. If you're looking for a can't-miss opportunity to own a stock with both stability and growth potential, take a look at The Motley Fool's free report on our Top Stock for 2012.
