CF Industries: Investors Likely To See Profits Ramp Up – Seeking Alpha

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CF Industries (CF) is extremely well-positioned to benefit from a perfect storm that is impacting its competitors.

You have a multi-factorial landscape that is driving CF Industries' revenues and profits to rapidly increase in the near term. There's the invasion of Ukraine that's destabilizing energy prices in Europe, strong agricultural demand, and high industrial use of nitrogen too.

This is all leading to a very strong demand for nitrogen, and CF Industries is very well positioned to benefit from this set up.

This is an attractive investment worth considering.

As you can see above, CF Industries' stock had been very volatile over the past 5 years, but ultimately it had gone nowhere fast.

In fact, even when CF Industries announced in December that it's raising its EBITDA guidance for 2021, the market didn't take a lot of notice, with the share price hardly moving over the next several days after the initial pop of 3% on the back of the announcement.

In short, investors were sleepy and unwilling to give CF much notice. However, that's now about to change.

CF Industries revenues growth rates

Looking back over the past decade, CF Industries has typically seen midteens swings in its topline, either up or down. Over the past decade, never has CF Industries reported triple-digits growth rates as it has just reported during Q4 2021.

Looking ahead to 2022, we are amidst a perfect storm, where global nitrogen inventory is low, demand is high, and the competition isn't able to feasibly produce enough fertilizer.

CF Industries revenue consensus

As you can see above, analysts are now upwards revising their model and I expect that over the next few days and weeks, we are going to see plentiful of further upwards revisions to its revenue estimates.

Natural gas is the principal raw material and primary fuel source used in the ammonia production process of nitrogen. Moreover, as has been widely reported, gas prices in Europe have spiked on the back of the invasion of Ukraine, and this has disrupted energy markets in Europe.

Meanwhile, gas prices in the US haven't meaningfully increased.

Given that natural gas accounts for approximately 40% of total production costs for nitrogen products, if gas prices increase in Europe, that means competitors will have to increase the prices of nitrogen products.

Consequently, in the US, CF Industries will also be able to raise its own costs, without having to meaningfully increase its input costs. This is going to lead to a bounty for shareholders.

Before discussing CF Industries' profitability, let's spend a moment on its balance sheet. For the past 3 years, the company has not accessed its revolver. Similarly, CF Industries exited Q4 2021 with the $750 million still undrawn.

CF Industries holds $1.6 billion in cash. That's offset by $3.3 billion of debt. This brings its net debt position to $1.7 billion, compared with $3.3 billion in the same period a year ago. Thus, consider this, during the past twelve months, CF Industries has seen its balance sheet improve its flexibility by more than $1.5 billion.

In Q4 of last year, free cash flow was approximately $200 million, while this time around free cash flow was approximately $1350 million, an increase of approximately 6.7x relative to the same period a year ago.

Now consider the following, for Q3 2021, CF Industries' free cash flow was approximately $300 million. Then, Q4 2021 saw its free cash flow soar to slightly over $1.1 billion.

To think about this from a different perspective, note the following, during the trailing 12 months that ended in Q3 2021, CF Industries' free cash flow reached $1 billion, and then, during the 90 day period that ended in December 2021, CF Industries reported slightly more free cash flow than during that 12-month period.

This demonstrates the impressive amount of operating leverage inherent in the business.

It's extremely difficult to value CF Industries because it very much depends on how long macro factors continue to drive its bottom-line profitability. In the same way that absolutely nobody could have predicted the disruption that COVID caused, or the invasion of Ukraine would take place, it's difficult to forecast how long these disruptions may last.

Presently, analysts expect that CF Industries will enter a more normalized environment starting in 2023, but these are wild guesses. Nevertheless, using those estimates the stock is priced at approximately 15x its 2023 EPS figures.

On the other hand, meaningful fertilizer manufacturing capacity could come online from outside the US faster than expected. This would rapidly increase fertilizer supply crushing average selling prices.

On the other hand, with global supply chains in chaos, as well as political uncertainty, even on the back of increased demand, it could take a while for supply to catch up with demand.

When investing, it's nice to invest alongside management that has a lot of skin in the game. CF Industries' management has some skin in the game. With total insider ownership averaging around 2%, which for a company with a market cap of $19 billion, we are talking about approximately $380 million of equity.

Thus, given that a rising tide lifts all boats, even if management didn't have enough skin in the game this is still likely to bring shareholders a bounty of profits.

This investment certainly looks interesting. Whatever you decide, good luck and happy investing.

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CF Industries: Investors Likely To See Profits Ramp Up - Seeking Alpha